Samsung Electro-Mechanics Co., Ltd.'s (KRX:009150) Price In Tune With Earnings

When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 13x, you may consider Samsung Electro-Mechanics Co., Ltd. (KRX:009150) as a stock to avoid entirely with its 27.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Samsung Electro-Mechanics has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Samsung Electro-Mechanics

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How Is Samsung Electro-Mechanics' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Samsung Electro-Mechanics' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. As a result, earnings from three years ago have also fallen 35% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 34% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we can see why Samsung Electro-Mechanics is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Samsung Electro-Mechanics maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Samsung Electro-Mechanics that you should be aware of.

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.