Despite an already strong run, KHVATEC Co.,Ltd. (KOSDAQ:060720) shares have been powering on, with a gain of 29% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about KHVATECLtd's P/E ratio of 12.3x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 14x. 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.
KHVATECLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for KHVATECLtd
How Is KHVATECLtd's Growth Trending?
KHVATECLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 31% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 8.2% each year as estimated by the dual analysts watching the company. That's shaping up to be materially lower than the 18% per annum growth forecast for the broader market.
In light of this, it's curious that KHVATECLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Bottom Line On KHVATECLtd's P/E
KHVATECLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.
We've established that KHVATECLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It is also worth noting that we have found 2 warning signs for KHVATECLtd (1 is a bit unpleasant!) that you need to take into consideration.
If you're unsure about the strength of KHVATECLtd's 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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