SK Innovation Co., Ltd.'s (KRX:096770) P/E Still Appears To Be Reasonable

With a price-to-earnings (or "P/E") ratio of 34.6x SK Innovation Co., Ltd. (KRX:096770) may be sending very bearish signals at the moment, given that almost half of all companies in Korea have P/E ratios under 12x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings that are retreating more than the market's of late, SK Innovation has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for SK Innovation

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like SK Innovation's to be considered reasonable.

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 55%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 99% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 20% each year, the company is positioned for a stronger earnings result.

With this information, we can see why SK Innovation is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

As we suspected, our examination of SK Innovation's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 4 warning signs we've spotted with SK Innovation (including 1 which makes us a bit uncomfortable).

Of course, you might also be able to find a better stock than SK Innovation. 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.

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