Korea Electric Power Industrial Development Co., Ltd's (KRX:130660) Popularity With Investors Under Threat As Stock Sinks 27%

To the annoyance of some shareholders, Korea Electric Power Industrial Development Co., Ltd (KRX:130660) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 29% in the last year.

In spite of the heavy fall in price, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 10x, you may still consider Korea Electric Power Industrial Development as a stock to avoid entirely with its 23x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Korea Electric Power Industrial Development's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Korea Electric Power Industrial Development

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 Korea Electric Power Industrial Development's earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Korea Electric Power Industrial Development's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. Even so, admirably EPS has lifted 91% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Korea Electric Power Industrial Development's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

A significant share price dive has done very little to deflate Korea Electric Power Industrial Development's very lofty P/E. 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 Korea Electric Power Industrial Development currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Korea Electric Power Industrial Development with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.