Potential Upside For Lotte Non - Life Insurance Co., Ltd. (KRX:000400) Not Without Risk

Lotte Non - Life Insurance Co., Ltd.'s (KRX:000400) price-to-earnings (or "P/E") ratio of 4.7x might make it look like a strong buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 11x and even P/E's above 22x 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 limited.

For example, consider that Lotte Non - Life Insurance's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Lotte Non - Life Insurance

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Lotte Non - Life Insurance's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Lotte Non - Life Insurance's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 928% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

This is in contrast to the rest of the market, which is expected to grow by 33% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Lotte Non - Life Insurance's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Lotte Non - Life Insurance revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Plus, you should also learn about these 2 warning signs we've spotted with Lotte Non - Life Insurance.

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.