With a price-earnings ratio (P/E) of 18.1 CJ Corporation (KRX:001040) may be sending very bearish signals right now, as nearly half of all Korean companies have a P/E ratio below 11x, and even P/E ratios below 6x are not uncommon. Still, we would have to dig a little deeper to determine if there is a rational basis for the greatly elevated P/E ratio.
The last few years have been encouraging for CJ, as earnings have increased despite declining market results. Many seem to expect the company to continue to defy general market adversities, which has increased investors’ willingness to pay. And one would hope so, otherwise one is paying a pretty high price for no particular reason.
Check out our latest analysis for CJ
Want to know how analysts see CJ’s future compared to the industry? In this case, our free Report is a good starting point.
Is there enough growth for CJ?
CJ’s P/E ratio would be typical of a company expected to have very strong growth and, more importantly, to significantly outperform the market.
If we look at the earnings growth over the last year, the company has seen a fantastic increase of 66%. However, the last three-year period has not been so great overall as it has not produced any growth at all. Therefore, it is fair to say that the company’s earnings growth has been inconsistent lately.
As for the outlook, the company is expected to deliver 36% annual growth over the next three years, according to estimates from the six analysts covering the company. With the market only expecting 20% annual growth, the company is positioned for a stronger result.
With this information, we can see why CJ is trading at such a high P/E compared to the market. It seems that most investors are expecting this strong future growth and are willing to pay more for the stock.
The most important things to take away
In general, we prefer to use the price-to-earnings ratio only when we want to determine what the market thinks about the overall health of a company.
As we suspected, our study of CJ’s analyst forecasts found that its above-average earnings outlook contributes to its high P/E ratio. At this point, investors believe that the potential for earnings deterioration is not large enough to justify a lower P/E ratio. Under these circumstances, it’s hard to imagine the share price falling much in the near future.
Before you form an opinion, we found out 3 warning signs for CJ that you should know.
It is important, Make sure you are looking for a great company and not just the first idea that comes to mind. So take a look at the free List of interesting companies with strong recent earnings growth (and low P/E ratios).
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
