Earnings Not Telling The Story For Cosmecca Korea Co., Ltd. (KOSDAQ:241710) After Shares Rise 25%

The Cosmecca Korea Co., Ltd. (KOSDAQ:241710) share price has done very well over the last month, posting an excellent gain of 25%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

In spite of the firm bounce in price, it's still not a stretch to say that Cosmecca Korea's price-to-earnings (or "P/E") ratio of 14.1x right now seems quite "middle-of-the-road" compared to the market in Korea, where the median P/E ratio is around 13x. 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.

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Recent times have been advantageous for Cosmecca Korea as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out 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.

How Is Cosmecca Korea's Growth Trending?

Cosmecca Korea's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 56% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 502% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 9.3% per annum over the next three years. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader market.

With this information, we find it interesting that Cosmecca Korea is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Cosmecca Korea 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.

We've established that Cosmecca Korea currently trades on a 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Cosmecca Korea with six simple checks will allow you to discover any risks that could be an issue.

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.