Market Cool On RedcapTour Co., Ltd.'s (KOSDAQ:038390) Earnings

With a price-to-earnings (or "P/E") ratio of 8.2x RedcapTour Co., Ltd. (KOSDAQ:038390) may be sending very bullish signals at the moment, given that almost half of all companies in Korea have P/E ratios greater than 18x and even P/E's higher than 39x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

RedcapTour certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for RedcapTour

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on RedcapTour's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far underperform the market for P/E ratios like RedcapTour's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 33%. The latest three year period has also seen an excellent 102% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 27% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that RedcapTour's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

The Bottom Line On RedcapTour's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that RedcapTour currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with RedcapTour (at least 1 which is concerning), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than RedcapTour. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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