SK Rent A Car Co., Ltd's (KRX:068400) Low P/E No Reason For Excitement

With a price-to-earnings (or "P/E") ratio of 14.6x SK Rent A Car Co., Ltd (KRX:068400) may be sending bullish signals at the moment, given that almost half of all companies in Korea have P/E ratios greater than 20x and even P/E's higher than 46x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Earnings have risen firmly for SK Rent A Car recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform 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 SK Rent A Car

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How Is SK Rent A Car's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 18%. Pleasingly, EPS has also lifted 48% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 42% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why SK Rent A Car is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that SK Rent A Car maintains its low P/E on the weakness of its recentthree-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for SK Rent A Car (1 is a bit concerning!) that we have uncovered.

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