Lindeman Asia Investment Corporation's (KOSDAQ:277070) Price Is Out Of Tune With Earnings

When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 11x, you may consider Lindeman Asia Investment Corporation (KOSDAQ:277070) as a stock to avoid entirely with its 18.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Lindeman Asia Investment over the last year, which is not ideal at all. 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.

Check out our latest analysis for Lindeman Asia Investment

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

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 4.1% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 54% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 29% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Lindeman Asia Investment is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate 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 Key Takeaway

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.

We've established that Lindeman Asia Investment currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Lindeman Asia Investment (1 is a bit unpleasant) you should be aware of.

If you're unsure about the strength of Lindeman Asia Investment's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.