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華爾街日報Watos Corea Co., Ltd.'s (KOSDAQ:079000) 28% Price Boost Is Out Of Tune With Earnings
Watos Corea Co., Ltd. (KOSDAQ:079000) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.
After such a large jump in price, Watos Corea may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 52.5x, since almost half of all companies in Korea have P/E ratios under 13x and even P/E's lower than 7x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
As an illustration, earnings have deteriorated at Watos Corea over the last year, which is not ideal at all. 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.
See our latest analysis for Watos Corea
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Watos Corea's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 64% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 80% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's alarming that Watos Corea'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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On Watos Corea's P/E
The strong share price surge has got Watos Corea's P/E rushing to great heights as well. 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 Watos Corea currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Watos Corea that you should be aware of.
If you're unsure about the strength of Watos Corea's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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