There's Reason For Concern Over Lotte Wellfood Co.,Ltd's (KRX:280360) Massive 26% Price Jump

Lotte Wellfood Co.,Ltd (KRX:280360) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 62%.

After such a large jump in price, Lotte WellfoodLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.5x, since 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 elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Lotte WellfoodLtd has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Lotte WellfoodLtd

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Lotte WellfoodLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 66% gain to the company's bottom line. As a result, it also grew EPS by 18% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 17% per annum over the next three years. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.

With this information, we find it concerning that Lotte WellfoodLtd is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Lotte WellfoodLtd's P/E?

Lotte WellfoodLtd's P/E is getting right up there since its shares have risen strongly. 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 Lotte WellfoodLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Lotte WellfoodLtd that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.