SILICON2 Co., Ltd.'s (KOSDAQ:257720) 91% Jump Shows Its Popularity With Investors

SILICON2 Co., Ltd. (KOSDAQ:257720) shares have continued their recent momentum with a 91% gain in the last month alone. The last 30 days were the cherry on top of the stock's 471% gain in the last year, which is nothing short of spectacular.

After such a large jump in price, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 13x, you may consider SILICON2 as a stock to avoid entirely with its 41.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, SILICON2 has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for SILICON2

Keen to find out how analysts think SILICON2'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?

There's an inherent assumption that a company should far outperform the market for P/E ratios like SILICON2's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 240% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 394% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 108% each year over the next three years. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

With this information, we can see why SILICON2 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

Shares in SILICON2 have built up some good momentum lately, which has really inflated its 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.

As we suspected, our examination of SILICON2's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Having said that, be aware SILICON2 is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of SILICON2'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.