With A 31% Price Drop For EO Technics Co., Ltd. (KOSDAQ:039030) You'll Still Get What You Pay For

Unfortunately for some shareholders, the EO Technics Co., Ltd. (KOSDAQ:039030) share price has dived 31% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 11% in that time.

Although its price has dipped substantially, EO Technics may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 49.1x, since almost half of all companies in Korea have P/E ratios under 11x 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 highly elevated P/E.

EO Technics has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for EO Technics

Want the full picture on analyst estimates for the company? Then our free report on EO Technics will help you uncover what's on the horizon.

How Is EO Technics' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 52%. Regardless, EPS has managed to lift by a handy 25% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 55% per annum as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

In light of this, it's understandable that EO Technics' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Even after such a strong price drop, EO Technics' P/E still exceeds the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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

You always need to take note of risks, for example - EO Technics has 3 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than EO Technics. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com