Despite an already strong run, TEMC Co., Ltd. (KOSDAQ:425040) shares have been powering on, with a gain of 25% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.5% in the last twelve months.
After such a large jump in price, TEMC may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.5x, since almost half of all companies in Korea have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
With earnings that are retreating more than the market's of late, TEMC has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, 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 TEMC
How Is TEMC's Growth Trending?
TEMC'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 44% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 78% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 163% over the next year. That's shaping up to be materially higher than the 33% growth forecast for the broader market.
In light of this, it's understandable that TEMC's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
The large bounce in TEMC's shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that TEMC maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for TEMC that you should be aware of.
Of course, you might also be able to find a better stock than TEMC. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
Valuation is complex, but we're here to simplify it.
Discover if TEMC might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.