Nasdaq
华尔街日报TSE Co., Ltd's (KOSDAQ:131290) 29% Share Price Surge Not Quite Adding Up
TSE Co., Ltd (KOSDAQ:131290) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 45%.
In spite of the firm bounce in price, it's still not a stretch to say that TSE's price-to-earnings (or "P/E") ratio of 15.7x right now seems quite "middle-of-the-road" compared to the market in Korea, where the median P/E ratio is around 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's superior to most other companies of late, TSE has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.
See our latest analysis for TSE
Does Growth Match The P/E?
In order to justify its P/E ratio, TSE would need to produce growth that's similar to the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 92% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 29% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 0.5% as estimated by the two analysts watching the company. With the market predicted to deliver 38% growth , that's a disappointing outcome.
With this information, we find it concerning that TSE is trading at a fairly similar P/E to the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.
The Key Takeaway
TSE appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 TSE currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about this 1 warning sign we've spotted with TSE.
Of course, you might also be able to find a better stock than TSE. 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.