SK Gas Co., Ltd. (KRX:018670) Might Not Be As Mispriced As It Looks

It's not a stretch to say that SK Gas Co., Ltd.'s (KRX:018670) price-to-earnings (or "P/E") ratio of 11.6x right now seems quite "middle-of-the-road" compared to the market in Korea, where the median P/E ratio is around 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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SK Gas hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for SK Gas

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SK Gas .

Does Growth Match The P/E?

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 43% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 28% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 37% per year over the next three years. With the market only predicted to deliver 17% each year, the company is positioned for a stronger earnings result.

With this information, we find it interesting that SK Gas is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From SK Gas' P/E?

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 SK Gas' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Having said that, be aware SK Gas is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

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.

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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.