Daemyoung Energy Co.,Ltd's (KOSDAQ:389260) Shares Climb 26% But Its Business Is Yet to Catch Up

Despite an already strong run, Daemyoung Energy Co.,Ltd (KOSDAQ:389260) shares have been powering on, with a gain of 26% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

After such a large jump in price, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 13x, you may consider Daemyoung EnergyLtd as a stock to avoid entirely with its 40.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Daemyoung EnergyLtd as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Daemyoung EnergyLtd

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Is There Enough Growth For Daemyoung EnergyLtd?

In order to justify its P/E ratio, Daemyoung EnergyLtd would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 53% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 45% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 5.7% during the coming year according to the one analyst following the company. Meanwhile, the broader market is forecast to expand by 27%, which paints a poor picture.

With this information, we find it concerning that Daemyoung EnergyLtd is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

Shares in Daemyoung EnergyLtd have built up some good momentum lately, which has really inflated its 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.

Our examination of Daemyoung EnergyLtd's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Daemyoung EnergyLtd that you need to be mindful of.

If these risks are making you reconsider your opinion on Daemyoung EnergyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.