Nasdaq
華爾街日報Sungmoon Electronics Co., Ltd. (KRX:014910) Surges 42% Yet Its Low P/E Is No Reason For Excitement
Sungmoon Electronics Co., Ltd. (KRX:014910) shares have had a really impressive month, gaining 42% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 43%.
Even after such a large jump in price, Sungmoon Electronics may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.5x, since almost half of all companies in Korea have P/E ratios greater than 14x and even P/E's higher than 30x 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 limited.
Sungmoon Electronics certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
View our latest analysis for Sungmoon Electronics
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Sungmoon Electronics would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered an exceptional 60% gain to the company's bottom line. Still, incredibly EPS has fallen 33% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we are not surprised that Sungmoon Electronics is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.
The Bottom Line On Sungmoon Electronics' P/E
The latest share price surge wasn't enough to lift Sungmoon Electronics' P/E close to the market median. 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.
As we suspected, our examination of Sungmoon Electronics revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 3 warning signs for Sungmoon Electronics that you need to be mindful of.
You might be able to find a better investment than Sungmoon Electronics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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