KX Innovation Co., Ltd.'s (KOSDAQ:122450) Price Is Right But Growth Is Lacking After Shares Rocket 27%

KX Innovation Co., Ltd. (KOSDAQ:122450) shareholders have had their patience rewarded with a 27% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 9.5% isn't as attractive.

Although its price has surged higher, KX Innovation may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 2.6x, since almost half of all companies in Korea have P/E ratios greater than 14x and even P/E's higher than 28x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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KX Innovation certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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How Is KX Innovation's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like KX Innovation's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 388% last year. The latest three year period has also seen an excellent 108% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 8.1% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 17% per year, which paints a poor picture.

In light of this, it's understandable that KX Innovation's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On KX Innovation's P/E

Even after such a strong price move, KX Innovation's P/E still trails the rest of the market significantly. 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 KX Innovation's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for KX Innovation (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than KX Innovation. 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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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.