There's Reason For Concern Over Samwha Electric Co.,Ltd.'s (KRX:009470) Massive 31% Price Jump

The Samwha Electric Co.,Ltd. (KRX:009470) share price has done very well over the last month, posting an excellent gain of 31%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

After such a large jump in price, Samwha ElectricLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 19x, since almost half of all companies in Korea have P/E ratios under 14x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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As an illustration, earnings have deteriorated at Samwha ElectricLtd over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Samwha ElectricLtd

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

Is There Enough Growth For Samwha ElectricLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Samwha ElectricLtd's 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 4.7%. The last three years don't look nice either as the company has shrunk EPS by 13% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 32% shows it's an unpleasant look.

In light of this, it's alarming that Samwha ElectricLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Samwha ElectricLtd's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Samwha ElectricLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Samwha ElectricLtd with six simple checks.

Of course, you might also be able to find a better stock than Samwha ElectricLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.