Why Investors Shouldn't Be Surprised By Cosmax, Inc.'s (KRX:192820) P/E

When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 13x, you may consider Cosmax, Inc. (KRX:192820) as a stock to avoid entirely with its 38.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Cosmax could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Cosmax

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

Is There Enough Growth For Cosmax?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. As a result, earnings from three years ago have also fallen 6.4% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 163% as estimated by the analysts watching the company. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Cosmax's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Cosmax's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Cosmax (1 is a bit unpleasant!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.