What SeA Mechanics Co., Ltd's (KOSDAQ:396300) 29% Share Price Gain Is Not Telling You

SeA Mechanics Co., Ltd (KOSDAQ:396300) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

After such a large jump in price, given around half the companies in Korea have price-to-earnings ratios (or "P/E's") below 11x, you may consider SeA Mechanics as a stock to potentially avoid with its 14.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

SeA Mechanics certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for SeA Mechanics

Want the full picture on analyst estimates for the company? Then our free report on SeA Mechanics will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, SeA Mechanics would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 71%. EPS has also lifted 21% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 12% per annum during the coming three years according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 16% per year, which is noticeably more attractive.

With this information, we find it concerning that SeA Mechanics is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

SeA Mechanics shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of SeA Mechanics' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - SeA Mechanics has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If you're unsure about the strength of SeA Mechanics' 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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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.