Some Shareholders Feeling Restless Over Coreana Cosmetics Co.,Ltd.'s (KOSDAQ:027050) P/E Ratio

When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 10x, you may consider Coreana Cosmetics Co.,Ltd. (KOSDAQ:027050) as a stock to avoid entirely with its 79.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For example, consider that Coreana CosmeticsLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Coreana CosmeticsLtd

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

How Is Coreana CosmeticsLtd's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 55% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 27% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Coreana CosmeticsLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Coreana CosmeticsLtd's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Coreana CosmeticsLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Coreana CosmeticsLtd that you need to take into consideration.

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.