Optimistic Investors Push Namsun Aluminum Co., Ltd. (KRX:008350) Shares Up 26% But Growth Is Lacking

Namsun Aluminum Co., Ltd. (KRX:008350) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 37% in the last twelve months.

After such a large jump in price, Namsun Aluminum may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.9x, since almost half of all companies in Korea have P/E ratios under 11x and even P/E's lower than 6x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Namsun Aluminum recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be 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 Namsun Aluminum

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 Namsun Aluminum's earnings, revenue and cash flow.

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

Namsun Aluminum's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. Still, incredibly EPS has fallen 74% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 34% shows it's an unpleasant look.

In light of this, it's alarming that Namsun Aluminum's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Namsun Aluminum's shares has lifted the company's P/E to a fairly high level. 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.

We've established that Namsun Aluminum currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Namsun Aluminum (including 1 which is a bit unpleasant).

Of course, you might also be able to find a better stock than Namsun Aluminum. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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