BGFecomaterials CO., LTD.'s (KOSDAQ:126600) 29% Price Boost Is Out Of Tune With Earnings
BGFecomaterials CO., LTD. (KOSDAQ:126600) 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 49%.
Although its price has surged higher, you could still be forgiven for feeling indifferent about BGFecomaterials' P/E ratio of 13.6x, since the median price-to-earnings (or "P/E") ratio in Korea is also close to 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Earnings have risen firmly for BGFecomaterials recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.
View our latest analysis for BGFecomaterials
What Are Growth Metrics Telling Us About The P/E?
BGFecomaterials' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
If we review the last year of earnings growth, the company posted a terrific increase of 19%. However, this wasn't enough as the latest three year period has seen a very unpleasant 37% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.
In light of this, it's somewhat alarming that BGFecomaterials' P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 the recent negative growth rates.
What We Can Learn From BGFecomaterials' P/E?
Its shares have lifted substantially and now BGFecomaterials' P/E is also back up 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.
Our examination of BGFecomaterials revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Having said that, be aware BGFecomaterials is showing 3 warning signs in our investment analysis, and 2 of those can't be ignored.
If you're unsure about the strength of BGFecomaterials' 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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