Earnings Tell The Story For Dongwon Industries Co., Ltd. (KRX:006040)

Explore Dongwon Industries's Fair Values from the Community and select yours

Dongwon Industries Co., Ltd.'s (KRX:006040) price-to-earnings (or "P/E") ratio of 28.4x might make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Dongwon Industries 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 recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Dongwon Industries

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

Is There Enough Growth For Dongwon Industries?

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

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 69%. The last three years don't look nice either as the company has shrunk EPS by 73% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 49% per year during the coming three years according to the lone analyst following the company. With the market only predicted to deliver 18% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Dongwon Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Dongwon Industries' P/E?

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.

We've established that Dongwon Industries maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Dongwon Industries (1 shouldn't be ignored) you should be aware of.

You might be able to find a better investment than Dongwon Industries. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.