Market Might Still Lack Some Conviction On STI Co., Ltd. (KOSDAQ:039440) Even After 25% Share Price Boost

STI Co., Ltd. (KOSDAQ:039440) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Looking further back, the 13% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about STI's P/E ratio of 13.6x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 15x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Recent times have been pleasing for STI as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for STI

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

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like STI's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. However, this wasn't enough as the latest three year period has seen a very unpleasant 35% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 40% each year as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 18% per year growth forecast for the broader market.

With this information, we find it interesting that STI is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

STI's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of STI's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for STI with six simple checks.

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

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

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.