There's Reason For Concern Over Samsung Electronics Co., Ltd.'s (KRX:005930) Price

With a median price-to-earnings (or "P/E") ratio of close to 11x in Korea, you could be forgiven for feeling indifferent about Samsung Electronics Co., Ltd.'s (KRX:005930) P/E ratio of 11.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

With earnings growth that's superior to most other companies of late, Samsung Electronics has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Samsung Electronics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Samsung Electronics .

Is There Some Growth For Samsung Electronics?

There's an inherent assumption that a company should be matching the market for P/E ratios like Samsung Electronics' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 132% last year. Still, incredibly EPS has fallen 14% 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 18% per year, which is noticeably more attractive.

In light of this, it's curious that Samsung Electronics' 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

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 Samsung Electronics' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Samsung Electronics with six simple checks on some of these key factors.

You might be able to find a better investment than Samsung 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.