AhnLab, Inc. (KOSDAQ:053800) Shares May Have Slumped 29% But Getting In Cheap Is Still Unlikely

AhnLab, Inc. (KOSDAQ:053800) shareholders won't be pleased to see that the share price has had a very rough month, dropping 29% and undoing the prior period's positive performance. The last month has meant the stock is now only up 4.5% during the last year.

Even after such a large drop in price, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 11x, you may still consider AhnLab as a stock to avoid entirely with its 18.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at AhnLab over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, 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 AhnLab

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on AhnLab will help you shine a light on its historical performance.

How Is AhnLab's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 8.8% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 27% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that AhnLab's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

A significant share price dive has done very little to deflate AhnLab's very lofty P/E. 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 AhnLab currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - AhnLab has 1 warning sign we think you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.