Why We're Not Concerned Yet About Caregen Co., Ltd.'s (KOSDAQ:214370) 26% Share Price Plunge

The Caregen Co., Ltd. (KOSDAQ:214370) share price has fared very poorly over the last month, falling by a substantial 26%. For any long-term shareholders, the last month ends a year to forget by locking in a 59% share price decline.

Although its price has dipped substantially, Caregen's price-to-earnings (or "P/E") ratio of 22.6x might still make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 11x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Caregen has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Caregen

Keen to find out how analysts think Caregen's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.1% last year. EPS has also lifted 9.6% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 36% over the next year. With the market only predicted to deliver 31%, the company is positioned for a stronger earnings result.

With this information, we can see why Caregen is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

A significant share price dive has done very little to deflate Caregen's very lofty P/E. 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.

We've established that Caregen maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Caregen (1 is concerning!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.

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