Korea Line Corporation (KRX:005880) Stock Catapults 39% Though Its Price And Business Still Lag The Market

Korea Line Corporation (KRX:005880) shares have had a really impressive month, gaining 39% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 34%.

Even after such a large jump in price, Korea Line's price-to-earnings (or "P/E") ratio of 6.9x might still make it look like a 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 27x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Korea Line as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Korea Line

Keen to find out how analysts think Korea Line's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Korea Line?

The only time you'd be truly comfortable seeing a P/E as low as Korea Line's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. Still, the latest three year period has seen an excellent 453% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the four analysts watching the company. With the market predicted to deliver 18% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Korea Line's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Korea Line's P/E?

The latest share price surge wasn't enough to lift Korea Line's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Korea Line's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Korea Line you should know about.

You might be able to find a better investment than Korea Line. 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.