Sunjin Beauty Science Co.Ltd's (KOSDAQ:086710) 30% Cheaper Price Remains In Tune With Earnings

The Sunjin Beauty Science Co.Ltd (KOSDAQ:086710) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. Still, a bad month hasn't completely ruined the past year with the stock gaining 33%, which is great even in a bull market.

Although its price has dipped substantially, Sunjin Beauty ScienceLtd's price-to-earnings (or "P/E") ratio of 23.8x might still 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 11x 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.

Sunjin Beauty ScienceLtd has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Sunjin Beauty ScienceLtd

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

Does Growth Match The High P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 70%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 233% in total over the last three years. 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.

Looking ahead now, EPS is anticipated to climb by 33% each year during the coming three years according to the only analyst following the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

With this information, we can see why Sunjin Beauty ScienceLtd 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 Key Takeaway

A significant share price dive has done very little to deflate Sunjin Beauty ScienceLtd's very lofty 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.

As we suspected, our examination of Sunjin Beauty ScienceLtd'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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Sunjin Beauty ScienceLtd (of which 1 can't be ignored!) you should know about.

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.

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