Some STO Co., Ltd. (KOSDAQ:098660) Shareholders Look For Exit As Shares Take 25% Pounding

STO Co., Ltd. (KOSDAQ:098660) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 11%.

Although its price has dipped substantially, STO's price-to-earnings (or "P/E") ratio of 42.1x might still make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 10x and even P/E's below 6x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For example, consider that STO's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for STO

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on STO's earnings, revenue and cash flow.

Is There Enough Growth For STO?

The only time you'd be truly comfortable seeing a P/E as steep as STO's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 27% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that STO's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From STO's P/E?

Even after such a strong price drop, STO's P/E still exceeds the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of STO revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware STO is showing 5 warning signs in our investment analysis, and 3 of those are concerning.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.