With A 32% Price Drop For SILICON2 Co., Ltd. (KOSDAQ:257720) You'll Still Get What You Pay For

The SILICON2 Co., Ltd. (KOSDAQ:257720) share price has fared very poorly over the last month, falling by a substantial 32%. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 208% in the last twelve months.

Although its price has dipped substantially, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 10x, you may still consider SILICON2 as a stock to avoid entirely with its 21x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

SILICON2 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Is There Enough Growth For SILICON2?

The only time you'd be truly comfortable seeing a P/E as steep as SILICON2's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 285% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 929% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 49% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 15% each year 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. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From SILICON2's P/E?

Even after such a strong price drop, SILICON2's P/E still exceeds the rest of the market significantly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that SILICON2 maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for SILICON2 you should know about.

If these risks are making you reconsider your opinion on SILICON2, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.