Take Care Before Diving Into The Deep End On LOTTE Fine Chemical Co., Ltd. (KRX:004000)

With a price-to-earnings (or "P/E") ratio of 8.6x LOTTE Fine Chemical Co., Ltd. (KRX:004000) may be sending bullish signals at the moment, given that almost half of all companies in Korea have P/E ratios greater than 12x and even P/E's higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

LOTTE Fine Chemical could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for LOTTE Fine Chemical

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How Is LOTTE Fine Chemical's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as LOTTE Fine Chemical's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 55%. This means it has also seen a slide in earnings over the longer-term as EPS is down 50% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 21% per annum during the coming three years according to the nine analysts following the company. With the market only predicted to deliver 16% per annum, the company is positioned for a stronger earnings result.

With this information, we find it odd that LOTTE Fine Chemical is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From LOTTE Fine Chemical's 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 LOTTE Fine Chemical's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook 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, but investors seem to think future earnings could see a lot of volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for LOTTE Fine Chemical you should be aware of.

You might be able to find a better investment than LOTTE Fine Chemical. 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.