Micro Contact Solution Co., Ltd. (KOSDAQ:098120) Investors Are Less Pessimistic Than Expected

Micro Contact Solution Co., Ltd.'s (KOSDAQ:098120) price-to-earnings (or "P/E") ratio of 42.6x 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 19x and even P/E's below 10x 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.

Micro Contact Solution has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Micro Contact Solution

Although there are no analyst estimates available for Micro Contact Solution, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Micro Contact Solution's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 46% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Micro Contact Solution 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

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.

Our examination of Micro Contact Solution revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Micro Contact Solution (1 can't be ignored!) that we have uncovered.

If you're unsure about the strength of Micro Contact Solution's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. 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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