SK Gas Co., Ltd. (KRX:018670) Could Be Riskier Than It Looks

There wouldn't be many who think SK Gas Co., Ltd.'s (KRX:018670) price-to-earnings (or "P/E") ratio of 10.8x is worth a mention when the median P/E in Korea is similar at about 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.

With earnings that are retreating more than the market's of late, SK Gas has been very sluggish. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for SK Gas

Keen to find out how analysts think SK Gas' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For SK Gas?

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

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 34% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 38% per annum as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 25% per annum growth forecast for the broader market.

In light of this, it's curious that SK Gas' P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of SK Gas' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 3 warning signs for SK Gas (1 is significant!) that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.