Union Community Co., Ltd.'s (KOSDAQ:203450) 31% Price Boost Is Out Of Tune With Earnings

Union Community Co., Ltd. (KOSDAQ:203450) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

After such a large jump in price, Union Community's price-to-earnings (or "P/E") ratio of 22.2x might make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 12x and even P/E's below 6x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For instance, Union Community's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Union Community

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Union Community would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 42% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Union Community's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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 heavily on the share price eventually.

The Final Word

Shares in Union Community have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Union Community revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Union Community (of which 1 is a bit unpleasant!) you should know about.

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