With A 26% Price Drop For Lake Materials Co., Ltd. (KOSDAQ:281740) You'll Still Get What You Pay For

The Lake Materials Co., Ltd. (KOSDAQ:281740) share price has fared very poorly over the last month, falling by a substantial 26%. The last month has meant the stock is now only up 5.7% during the last year.

In spite of the heavy fall in price, Lake Materials may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 40.6x, since almost half of all companies in Korea have P/E ratios under 10x and even P/E's lower than 5x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Lake Materials 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 Lake Materials

Keen to find out how analysts think Lake Materials' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Lake Materials' Growth Trending?

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

Retrospectively, the last year delivered a frustrating 34% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 67% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 41% over the next year. Meanwhile, the rest of the market is forecast to only expand by 26%, which is noticeably less attractive.

With this information, we can see why Lake Materials 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 Bottom Line On Lake Materials' P/E

Lake Materials' shares may have retreated, but its P/E is still flying high. 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.

As we suspected, our examination of Lake Materials' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Plus, you should also learn about these 2 warning signs we've spotted with Lake Materials.

You might be able to find a better investment than Lake Materials. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.