Hanmi Pharm. Co., Ltd.'s (KRX:128940) Shares Climb 29% But Its Business Is Yet to Catch Up

Hanmi Pharm. Co., Ltd. (KRX:128940) shares have continued their recent momentum with a 29% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 33%.

After such a large jump in price, Hanmi Pharm may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 37.8x, since almost half of all companies in Korea have P/E ratios under 14x and even P/E's lower than 7x 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 lofty.

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Hanmi Pharm has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, 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.

See our latest analysis for Hanmi Pharm

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

How Is Hanmi Pharm's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 91% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 30% during the coming year according to the analysts following the company. That's shaping up to be materially lower than the 35% growth forecast for the broader market.

With this information, we find it concerning that Hanmi Pharm is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in Hanmi Pharm have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Hanmi Pharm's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Hanmi Pharm, and understanding should be part of your investment process.

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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.