Subdued Growth No Barrier To Gyeongnam Steel Co., Ltd (KOSDAQ:039240) With Shares Advancing 52%

The Gyeongnam Steel Co., Ltd (KOSDAQ:039240) share price has done very well over the last month, posting an excellent gain of 52%. The last 30 days bring the annual gain to a very sharp 34%.

Since its price has surged higher, Gyeongnam Steel's price-to-earnings (or "P/E") ratio of 25.6x 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 10x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Gyeongnam Steel over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Gyeongnam Steel

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Is There Enough Growth For Gyeongnam Steel?

In order to justify its P/E ratio, Gyeongnam Steel would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. Regardless, EPS has managed to lift by a handy 7.0% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

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

With this information, we find it concerning that Gyeongnam Steel is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Gyeongnam Steel's P/E

Shares in Gyeongnam Steel have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Gyeongnam Steel revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Gyeongnam Steel (of which 1 is concerning!) you should know about.

If these risks are making you reconsider your opinion on Gyeongnam Steel, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.