POSCO Holdings Inc.'s (KRX:005490) Earnings Haven't Escaped The Attention Of Investors
With a price-to-earnings (or "P/E") ratio of 52.9x POSCO Holdings Inc. (KRX:005490) may be sending very bearish signals at the moment, given that almost half of all companies in Korea have P/E ratios under 13x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
POSCO Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, 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 POSCO Holdings
Does Growth Match The High P/E?
In order to justify its P/E ratio, POSCO Holdings would need to produce outstanding growth well in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 65%. As a result, earnings from three years ago have also fallen 91% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 278% over the next year. Meanwhile, the rest of the market is forecast to only expand by 39%, which is noticeably less attractive.
In light of this, it's understandable that POSCO Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From POSCO Holdings' P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of POSCO Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 3 warning signs for POSCO Holdings (1 is potentially serious!) that we have uncovered.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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