Cosmecca Korea Co., Ltd.'s (KOSDAQ:241710) 38% Share Price Plunge Could Signal Some Risk

Cosmecca Korea Co., Ltd. (KOSDAQ:241710) shareholders that were waiting for something to happen have been dealt a blow with a 38% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 28% in the last year.

In spite of the heavy fall in price, Cosmecca Korea may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 15x, since almost half of all companies in Korea have P/E ratios under 10x and even P/E's lower than 5x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Cosmecca Korea certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Cosmecca Korea

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Cosmecca Korea's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 98% last year. Pleasingly, EPS has also lifted 377% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 34% as estimated by the seven analysts watching the company. That's shaping up to be similar to the 34% growth forecast for the broader market.

In light of this, it's curious that Cosmecca Korea's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Cosmecca Korea's P/E?

Despite the recent share price weakness, Cosmecca Korea's P/E remains higher than 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 Cosmecca Korea's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Cosmecca Korea that you need to be mindful of.

You might be able to find a better investment than Cosmecca Korea. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.