ATON Inc.'s (KOSDAQ:158430) 44% Share Price Surge Not Quite Adding Up

Despite an already strong run, ATON Inc. (KOSDAQ:158430) shares have been powering on, with a gain of 44% in the last thirty days. The last 30 days bring the annual gain to a very sharp 83%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about ATON's P/E ratio of 11.6x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

ATON could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Check out our latest analysis for ATON

Keen to find out how analysts think ATON's future stacks up against the industry? In that case, our free report is a great place to start.

How Is ATON's Growth Trending?

In order to justify its P/E ratio, ATON would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 200% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 23% as estimated by the one analyst watching the company. Meanwhile, the broader market is forecast to expand by 33%, which paints a poor picture.

With this information, we find it concerning that ATON is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

What We Can Learn From ATON's P/E?

ATON appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of ATON's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for ATON you should know about.

You might be able to find a better investment than ATON. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.