Jeju Semiconductor Corp.'s (KOSDAQ:080220) Shares Climb 39% But Its Business Is Yet to Catch Up

Jeju Semiconductor Corp. (KOSDAQ:080220) shares have had a really impressive month, gaining 39% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.4% over the last year.

Since its price has surged higher, Jeju Semiconductor's price-to-earnings (or "P/E") ratio of 36.6x might 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 13x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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For example, consider that Jeju Semiconductor's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Jeju Semiconductor

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jeju Semiconductor's earnings, revenue and cash flow.

Is There Enough Growth For Jeju Semiconductor?

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

Retrospectively, the last year delivered a frustrating 7.9% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 44% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 28% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Jeju Semiconductor is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Jeju Semiconductor's P/E

The strong share price surge has got Jeju Semiconductor's P/E rushing to great heights as well. 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.

Our examination of Jeju Semiconductor revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Jeju Semiconductor that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.