Pinning Down Ahn-Gook Pharmaceutical Co., Ltd.'s (KOSDAQ:001540) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 13.7x Ahn-Gook Pharmaceutical Co., Ltd. (KOSDAQ:001540) may be sending bearish signals at the moment, given that 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.

For example, consider that Ahn-Gook Pharmaceutical's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Ahn-Gook Pharmaceutical

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

In order to justify its P/E ratio, Ahn-Gook Pharmaceutical would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 31% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Ahn-Gook Pharmaceutical'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 Final Word

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 Ahn-Gook Pharmaceutical currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Ahn-Gook Pharmaceutical (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Ahn-Gook Pharmaceutical'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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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.