Anam Electronics Co.,Ltd.'s (KRX:008700) 26% Share Price Surge Not Quite Adding Up

Anam Electronics Co.,Ltd. (KRX:008700) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 38% in the last twelve months.

Although its price has surged higher, it's still not a stretch to say that Anam ElectronicsLtd's price-to-earnings (or "P/E") ratio of 11.7x right now seems quite "middle-of-the-road" compared to the market in Korea, where the median P/E ratio is around 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

The earnings growth achieved at Anam ElectronicsLtd over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Anam ElectronicsLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Anam ElectronicsLtd will help you shine a light on its historical performance.

How Is Anam ElectronicsLtd's Growth Trending?

The only time you'd be comfortable seeing a P/E like Anam ElectronicsLtd's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. As a result, it also grew EPS by 26% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 34% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Anam ElectronicsLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On Anam ElectronicsLtd's P/E

Anam ElectronicsLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Anam ElectronicsLtd revealed its three-year earnings trends aren't impacting its P/E 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 moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Anam ElectronicsLtd is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Anam ElectronicsLtd. 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.