Dream Security co., Ltd. (KOSDAQ:203650) Might Not Be As Mispriced As It Looks

Dream Security co., Ltd.'s (KOSDAQ:203650) price-to-earnings (or "P/E") ratio of 6.1x might make it look like a buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 11x and even P/E's above 22x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Dream Security has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

View our latest analysis for Dream Security

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

How Is Dream Security's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Dream Security's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. The strong recent performance means it was also able to grow EPS by 470% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 31% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Dream Security's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Dream Security revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Dream Security (1 shouldn't be ignored!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com