Improved Earnings Required Before SK Gas Co., Ltd. (KRX:018670) Shares Find Their Feet

SK Gas Co., Ltd.'s (KRX:018670) price-to-earnings (or "P/E") ratio of 6.8x might 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 14x and even P/E's above 30x 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.

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With earnings growth that's superior to most other companies of late, SK Gas has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for SK Gas

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SK Gas.

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 80%. The latest three year period has also seen an excellent 137% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.0% during the coming year according to the five analysts following the company. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

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

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

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

Before you settle on your opinion, we've discovered 1 warning sign for SK Gas that you should be aware of.

Of course, you might also be able to find a better stock than SK Gas. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.