GSE Co., Ltd. (KOSDAQ:053050) shareholders would be happy to hear that the share price had a great month, posting a 27% gain and recovering from previous weakness. Looking back a little further, it’s encouraging to see that the stock is up 32% over the past year.
Given the significant price increase and the fact that nearly half of Korean companies have a price-to-earnings (P/E) ratio of less than 11, you may want to consider GSE, with its P/E ratio of 20.8, as a stock to avoid altogether. However, it is not advisable to simply take the P/E ratio at face value, as there may be an explanation as to why it is so high.
GSE’s earnings have been growing significantly recently, which is encouraging. One possibility is that the P/E ratio is high because investors believe this substantial earnings growth will be enough to outperform the broader market in the near future. If not, existing shareholders may be a little nervous about the profitability of the share price.
Check out our latest analysis for GSE
Do you want a complete overview of the company’s profit, sales and cash flow? Then free The report on GSE will help you shed light on the historical performance.
Is the growth appropriate for the high P/E ratio?
GSE’s P/E ratio would be typical of a company expected to deliver very strong growth and, more importantly, significantly outperform the market.
First, if we look back, we can see that the company grew its earnings per share by an impressive 21% last year. Over the last three-year period, overall earnings per share also grew by 11%, thanks largely to short-term performance. Accordingly, shareholders would likely have been pleased with the medium-term earnings growth rates.
Compared to the market, which is forecast to grow by 31 percent over the next twelve months, the company’s momentum is weaker based on recent medium-term annualized earnings figures.
With this in mind, it is alarming that GSE’s P/E ratio is higher than most other companies. Clearly, many investors in the company are much more optimistic than its recent history would suggest, and are not willing to dump their shares at any price. Only the bravest would assume that these prices are sustainable, as a continuation of recent earnings trends will likely ultimately weigh heavily on the share price.
What can we learn from GSE’s P/E ratio?
GSE shares have been building up good momentum recently, which has pushed its P/E ratio up significantly. We would say that the price-to-earnings ratio is not primarily used as a valuation tool, but rather to gauge the current sentiment of investors and their future expectations.
We have found that GSE is currently trading at a significantly higher P/E than expected, as its recent growth over the past three years is below the general market forecast. When we see weak earnings and slower-than-market growth, we suspect the share price could decline, driving the high P/E down. Unless recent medium-term conditions improve significantly, it is very difficult to accept these prices as reasonable.
There are also other important risk factors that need to be considered and we have found 3 warning signs for GSE (2 are a bit unpleasant!) that you should know before investing here.
If you uncertain about the strength of GSE’s businesswhy not explore our interactive stock list with solid business fundamentals for some other companies you may have missed.
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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.
