Market Might Still Lack Some Conviction On Silla Co.,Ltd (KRX:004970) Even After 26% Share Price Boost

Silla Co.,Ltd (KRX:004970) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 6.3% isn't as attractive.

Although its price has surged higher, SillaLtd may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.6x, since almost half of all companies in Korea have P/E ratios greater than 13x and even P/E's higher than 27x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

SillaLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for SillaLtd

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, SillaLtd would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 210% gain to the company's bottom line. The latest three year period has also seen an excellent 188% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 33% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that SillaLtd's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

Shares in SillaLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that SillaLtd currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 2 warning signs for SillaLtd (of which 1 makes us a bit uncomfortable!) you should know about.

If these risks are making you reconsider your opinion on SillaLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.