KoMiCo Ltd.'s (KOSDAQ:183300) 26% Share Price Surge Not Quite Adding Up

KoMiCo Ltd. (KOSDAQ:183300) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 95% in the last year.

After such a large jump in price, KoMiCo may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.8x, since almost half of all companies in Korea have P/E ratios under 14x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, KoMiCo has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, 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.

View our latest analysis for KoMiCo

If you'd like to see what analysts are forecasting going forward, you should check out our free report on KoMiCo.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 45% gain to the company's bottom line. As a result, it also grew EPS by 25% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 14% per annum during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 18% per year, which is noticeably more attractive.

In light of this, it's alarming that KoMiCo's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

KoMiCo's P/E is getting right up there since its shares have risen strongly. 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.

We've established that KoMiCo currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with KoMiCo (including 2 which shouldn't be ignored).

You might be able to find a better investment than KoMiCo. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.