PJ Electronics Co., Ltd.'s (KOSDAQ:006140) 29% Share Price Surge Not Quite Adding Up

Despite an already strong run, PJ Electronics Co., Ltd. (KOSDAQ:006140) shares have been powering on, with a gain of 29% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.7% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about PJ Electronics' P/E ratio of 12.8x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

PJ Electronics certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for PJ Electronics

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

Is There Some Growth For PJ Electronics?

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

If we review the last year of earnings growth, the company posted a terrific increase of 47%. Still, incredibly EPS has fallen 19% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 28% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that PJ Electronics is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Final Word

PJ Electronics' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 PJ Electronics currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for PJ Electronics you should be aware of.

You might be able to find a better investment than PJ Electronics. 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.