When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 15x, you may consider Korea Computer & Systems Inc. (KOSDAQ:115500) as a stock to avoid entirely with its 48.3x 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.
The recent earnings growth at Korea Computer & Systems would have to be considered satisfactory if not spectacular. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Korea Computer & Systems
How Is Korea Computer & Systems' Growth Trending?
In order to justify its P/E ratio, Korea Computer & Systems would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a decent 6.8% gain to the company's bottom line. EPS has also lifted 10% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 33% shows it's noticeably less attractive on an annualised basis.
In light of this, it's alarming that Korea Computer & Systems' 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Bottom Line On Korea Computer & Systems' P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Korea Computer & Systems currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
There are also other vital risk factors to consider and we've discovered 3 warning signs for Korea Computer & Systems (1 is potentially serious!) that you should be aware of before investing here.
If you're unsure about the strength of Korea Computer & Systems' 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.