There's Reason For Concern Over Samhwa Paints Industrial Co., Ltd.'s (KRX:000390) Massive 34% Price Jump
Samhwa Paints Industrial Co., Ltd. (KRX:000390) shareholders have had their patience rewarded with a 34% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.
Since its price has surged higher, Samhwa Paints Industrial may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 23.7x, 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.
For example, consider that Samhwa Paints Industrial's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
Check out our latest analysis for Samhwa Paints Industrial
What Are Growth Metrics Telling Us About The High P/E?
Samhwa Paints Industrial's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than 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 44%. The last three years don't look nice either as the company has shrunk EPS by 36% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.
With this information, we find it concerning that Samhwa Paints Industrial is trading at a P/E higher than the market. 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 very 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.
The Final Word
Shares in Samhwa Paints Industrial have built up some good momentum lately, which has really inflated its P/E. 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.
We've established that Samhwa Paints Industrial currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
It is also worth noting that we have found 4 warning signs for Samhwa Paints Industrial (1 makes us a bit uncomfortable!) that you need to take into consideration.
Of course, you might also be able to find a better stock than Samhwa Paints Industrial. 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.