With A 25% Price Drop For Gaonchips Co., Ltd. (KOSDAQ:399720) You'll Still Get What You Pay For

The Gaonchips Co., Ltd. (KOSDAQ:399720) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 38% share price drop.

In spite of the heavy fall in price, Gaonchips' price-to-earnings (or "P/E") ratio of 54.3x 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 10x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, Gaonchips has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Gaonchips

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 20% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 170% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 34% growth forecast for the broader market.

With this information, we can see why Gaonchips is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Even after such a strong price drop, Gaonchips' P/E still exceeds the rest of the market significantly. 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 Gaonchips' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Gaonchips that you should be aware of.

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.