LK Samyang Co., Ltd's (KOSDAQ:225190) 25% Share Price Surge Not Quite Adding Up

LK Samyang Co., Ltd (KOSDAQ:225190) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking further back, the 10% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, LK Samyang may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 44.7x, since almost half of all companies in Korea have P/E ratios under 12x and even P/E's lower than 6x are not unusual. 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 LK Samyang's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for LK Samyang

Although there are no analyst estimates available for LK Samyang, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is LK Samyang's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 52%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 31% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that LK Samyang's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On LK Samyang's P/E

LK Samyang's P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of LK Samyang 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. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - LK Samyang has 5 warning signs (and 2 which are a bit concerning) we think you should know about.

Of course, you might also be able to find a better stock than LK Samyang. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.