SUN KWANG CO.,Ltd. (KOSDAQ:003100) Shares Fly 26% But Investors Aren't Buying For Growth

Despite an already strong run, SUN KWANG CO.,Ltd. (KOSDAQ:003100) shares have been powering on, with a gain of 26% in the last thirty days. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, SUN KWANGLtd's price-to-earnings (or "P/E") ratio of 4.2x might still make it look like a strong buy right now compared to the market in Korea, where around half of the companies have P/E ratios above 13x and even P/E's above 26x 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 limited.

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For instance, SUN KWANGLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 out of favour.

Check out our latest analysis for SUN KWANGLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on SUN KWANGLtd will help you shine a light on its historical performance.

How Is SUN KWANGLtd's Growth Trending?

In order to justify its P/E ratio, SUN KWANGLtd would need to produce anemic growth that's substantially trailing the market.

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 4.8%. The last three years don't look nice either as the company has shrunk EPS by 5.0% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that SUN KWANGLtd's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Shares in SUN KWANGLtd are going to need a lot more upward momentum to get the company's P/E out of its slump. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of SUN KWANGLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for SUN KWANGLtd that you need to be mindful 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.