After Leaping 28% HANMI Semiconductor Co., Ltd. (KRX:042700) Shares Are Not Flying Under The Radar

Despite an already strong run, HANMI Semiconductor Co., Ltd. (KRX:042700) shares have been powering on, with a gain of 28% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 40% in the last twelve months.

After such a large jump in price, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 12x, you may consider HANMI Semiconductor as a stock to avoid entirely with its 69.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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While the market has experienced earnings growth lately, HANMI Semiconductor's earnings have gone into reverse gear, which is not great. It might be that many expect the dour 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.

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Is There Enough Growth For HANMI Semiconductor?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 31%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 40% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 60% per year during the coming three years according to the ten analysts following the company. That's shaping up to be materially higher than the 18% each year growth forecast for the broader market.

With this information, we can see why HANMI Semiconductor is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On HANMI Semiconductor's P/E

Shares in HANMI Semiconductor have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of HANMI Semiconductor's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for HANMI Semiconductor that you should be aware of.

If you're unsure about the strength of HANMI Semiconductor's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.