The Market Lifts Hanjin Heavy Industries & Construction Holdings Co., Ltd. (KRX:003480) Shares 27% But It Can Do More

Hanjin Heavy Industries & Construction Holdings Co., Ltd. (KRX:003480) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

Even after such a large jump in price, Hanjin Heavy Industries & Construction Holdings' price-to-earnings (or "P/E") ratio of 2.6x 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 15x and even P/E's above 35x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Hanjin Heavy Industries & Construction Holdings as its earnings have been rising very briskly. 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 Hanjin Heavy Industries & Construction Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hanjin Heavy Industries & Construction Holdings will help you shine a light on its historical performance.

How Is Hanjin Heavy Industries & Construction Holdings' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Hanjin Heavy Industries & Construction Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 163% last year. Pleasingly, EPS has also lifted 2,787% 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 only predicted to deliver 33% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Hanjin Heavy Industries & Construction Holdings is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Hanjin Heavy Industries & Construction Holdings' P/E?

Even after such a strong price move, Hanjin Heavy Industries & Construction Holdings' P/E still trails the rest of the market significantly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hanjin Heavy Industries & Construction Holdings currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Hanjin Heavy Industries & Construction Holdings (1 doesn't sit too well with us!) that you should be aware of.

If these risks are making you reconsider your opinion on Hanjin Heavy Industries & Construction Holdings, 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.