Kumho Petro Chemical Co.,Ltd's (KRX:011780) price-to-earnings (or "P/E") ratio of 11.8x might make it look like a buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 15x and even P/E's above 35x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
With earnings that are retreating more than the market's of late, Kumho Petro ChemicalLtd has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.
Check out our latest analysis for Kumho Petro ChemicalLtd
How Is Kumho Petro ChemicalLtd's Growth Trending?
There's an inherent assumption that a company should underperform the market for P/E ratios like Kumho Petro ChemicalLtd's to be considered reasonable.
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 45%. This means it has also seen a slide in earnings over the longer-term as EPS is down 84% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 28% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 18% per annum, which is noticeably less attractive.
In light of this, it's peculiar that Kumho Petro ChemicalLtd's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Kumho Petro ChemicalLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Kumho Petro ChemicalLtd that you need to be mindful of.
If you're unsure about the strength of Kumho Petro ChemicalLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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