Korea Information Certificate Authority, Inc.'s (KOSDAQ:053300) 25% Price Boost Is Out Of Tune With Earnings

Korea Information Certificate Authority, Inc. (KOSDAQ:053300) shareholders have had their patience rewarded with a 25% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.7% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think Korea Information Certificate Authority's price-to-earnings (or "P/E") ratio of 11.5x is worth a mention when the median P/E in Korea is similar at about 12x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Korea Information Certificate Authority certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

View our latest analysis for Korea Information Certificate Authority

Although there are no analyst estimates available for Korea Information Certificate Authority, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Korea Information Certificate Authority's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Korea Information Certificate Authority's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 38%. EPS has also lifted 11% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 34% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Korea Information Certificate Authority is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Korea Information Certificate Authority appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Korea Information Certificate Authority currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 2 warning signs for Korea Information Certificate Authority 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.