C&G Hi Tech Co., Ltd's (KOSDAQ:264660) Business Is Trailing The Market But Its Shares Aren't

C&G Hi Tech Co., Ltd's (KOSDAQ:264660) price-to-earnings (or "P/E") ratio of 18.4x might make it look like a sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 15x and even P/E's below 7x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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For example, consider that C&G Hi Tech's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for C&G Hi Tech

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

How Is C&G Hi Tech's Growth Trending?

C&G Hi Tech's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 19% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 33% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that C&G Hi Tech is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

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 C&G Hi Tech currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for C&G Hi Tech (of which 1 is a bit concerning!) you should know about.

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.