PharmaResearch Co., Ltd.'s (KOSDAQ:214450) 33% Share Price Surge Not Quite Adding Up

PharmaResearch Co., Ltd. (KOSDAQ:214450) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 33%.

After such a large jump in price, PharmaResearch may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.8x, since almost half of all companies in Korea have P/E ratios under 12x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

PharmaResearch certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for PharmaResearch

If you'd like to see what analysts are forecasting going forward, you should check out our free report on PharmaResearch.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 86% gain to the company's bottom line. Pleasingly, EPS has also lifted 118% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 28% over the next year. Meanwhile, the rest of the market is forecast to expand by 27%, which is not materially different.

In light of this, it's curious that PharmaResearch's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

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

PharmaResearch shares have received a push in the right direction, but its P/E is elevated too. 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 PharmaResearch currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - PharmaResearch has 1 warning sign we think you should be aware 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.