Why Investors Shouldn't Be Surprised By AMOREPACIFIC Group's (KRX:002790) 27% Share Price Surge

Despite an already strong run, AMOREPACIFIC Group (KRX:002790) shares have been powering on, with a gain of 27% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.0% over the last year.

Following the firm bounce in price, AMOREPACIFIC Group's price-to-earnings (or "P/E") ratio of 25.3x might make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 13x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, AMOREPACIFIC Group has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for AMOREPACIFIC Group

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as AMOREPACIFIC Group's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 92% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 958% 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 six analysts covering the company suggest earnings should grow by 34% per year over the next three years. With the market only predicted to deliver 21% per year, the company is positioned for a stronger earnings result.

With this information, we can see why AMOREPACIFIC Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Shares in AMOREPACIFIC Group have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that AMOREPACIFIC Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

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

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.