Why Investors Shouldn't Be Surprised By Tonymoly Co., Ltd's (KRX:214420) 27% Share Price Surge

Tonymoly Co., Ltd (KRX:214420) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.

After such a large jump in price, Tonymoly's price-to-earnings (or "P/E") ratio of 32x 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 12x and even P/E's below 6x are quite common. 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.

Tonymoly certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For Tonymoly?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 89% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 267% over the next year. With the market only predicted to deliver 28%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Tonymoly'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 Final Word

Shares in Tonymoly have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Tonymoly 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Tonymoly with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Tonymoly. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.