Some Confidence Is Lacking In Samsung C&T Corporation's (KRX:028260) P/E
When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 13x, you may consider Samsung C&T Corporation (KRX:028260) as a stock to potentially avoid with its 18.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, Samsung C&T's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
View our latest analysis for Samsung C&T
What Are Growth Metrics Telling Us About The High P/E?
Samsung C&T's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform 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 2.2%. Regardless, EPS has managed to lift by a handy 18% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Turning to the outlook, the next year should generate growth of 16% as estimated by the analysts watching the company. With the market predicted to deliver 36% growth , the company is positioned for a weaker earnings result.
In light of this, it's alarming that Samsung C&T's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
What We Can Learn From Samsung C&T's 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.
Our examination of Samsung C&T's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Samsung C&T with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Samsung C&T. 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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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.