STI Co., Ltd. (KOSDAQ:039440) Stocks Pounded By 27% But Not Lagging Market On Growth Or Pricing

STI Co., Ltd. (KOSDAQ:039440) shares have had a horrible month, losing 27% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 2.2% over the last twelve months.

Although its price has dipped substantially, STI's price-to-earnings (or "P/E") ratio of 22.9x might still make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 12x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for STI as its earnings have been falling quicker 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.

View our latest analysis for STI

Keen to find out how analysts think STI's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For STI?

In order to justify its P/E ratio, STI would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 80% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 51% each year over the next three years. That's shaping up to be materially higher than the 20% per year growth forecast for the broader market.

In light of this, it's understandable that STI's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

A significant share price dive has done very little to deflate STI's very lofty P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of STI'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.

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

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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