VALOFE Co.,Ltd's (KOSDAQ:331520) Popularity With Investors Under Threat As Stock Sinks 26%

VALOFE Co.,Ltd (KOSDAQ:331520) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Longer-term shareholders would now have taken a real hit with the stock declining 9.8% in the last year.

Although its price has dipped substantially, VALOFELtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 23.1x, 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 quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, VALOFELtd has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for VALOFELtd

Although there are no analyst estimates available for VALOFELtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For VALOFELtd?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 119% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 38% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 24% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that VALOFELtd'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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From VALOFELtd's P/E?

VALOFELtd's shares may have retreated, but its P/E is still flying high. 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 VALOFELtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for VALOFELtd (1 makes us a bit uncomfortable!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.