What Sajo Industries Company Limited's (KRX:007160) 38% Share Price Gain Is Not Telling You

Despite an already strong run, Sajo Industries Company Limited (KRX:007160) shares have been powering on, with a gain of 38% in the last thirty days. The last 30 days bring the annual gain to a very sharp 46%.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Sajo Industries' P/E ratio of 12x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 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.

As an illustration, earnings have deteriorated at Sajo Industries over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Sajo Industries

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

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Sajo Industries would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 28% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 31% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Sajo Industries' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Key Takeaway

Sajo Industries appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Sajo Industries revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Sajo Industries (of which 2 are a bit concerning!) you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.