Lotte Data Communication Company's (KRX:286940) 25% Share Price Plunge Could Signal Some Risk

Lotte Data Communication Company (KRX:286940) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 35%, which is great even in a bull market.

Even after such a large drop in price, there still wouldn't be many who think Lotte Data Communication's price-to-earnings (or "P/E") ratio of 13x is worth a mention when the median P/E in Korea is similar at about 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been pleasing for Lotte Data Communication as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Lotte Data Communication

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How Is Lotte Data Communication's Growth Trending?

The only time you'd be comfortable seeing a P/E like Lotte Data Communication's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 196%. The latest three year period has also seen a 28% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 9.3% over the next year. Meanwhile, the rest of the market is forecast to expand by 37%, which is noticeably more attractive.

In light of this, it's curious that Lotte Data Communication's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Lotte Data Communication's plummeting stock price has brought its P/E right back to the rest of the market. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Lotte Data Communication currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Lotte Data Communication (1 can't be ignored!) that we have uncovered.

Of course, you might also be able to find a better stock than Lotte Data Communication. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.