DB HiTek CO., LTD. (KRX:000990) Stock Catapults 29% Though Its Price And Business Still Lag The Market

DB HiTek CO., LTD. (KRX:000990) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 55%.

In spite of the firm bounce in price, DB HiTek may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.2x, since almost half of all companies in Korea have P/E ratios greater than 16x and even P/E's higher than 35x 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 limited.

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With its earnings growth in positive territory compared to the declining earnings of most other companies, DB HiTek has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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Is There Any Growth For DB HiTek?

DB HiTek's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.8% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 54% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 8.2% per annum as estimated by the dual analysts watching the company. With the market predicted to deliver 18% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why DB HiTek is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From DB HiTek's P/E?

The latest share price surge wasn't enough to lift DB HiTek's P/E close to the market median. 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 DB HiTek maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 1 warning sign for DB HiTek you should know about.

If these risks are making you reconsider your opinion on DB HiTek, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.