Earnings Not Telling The Story For Hannong Chemicals Inc. (KRX:011500)

With a price-to-earnings (or “P/E”) ratio of 47.7x Hannong Chemicals Inc. (KRX:011500) 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.

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Earnings have risen firmly for Hannong Chemicals recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

View our latest analysis for Hannong Chemicals

We don’t have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hannong Chemicals’ earnings, revenue and cash flow.

Does Growth Match The High P/E?

There’s an inherent assumption that a company should far outperform the market for P/E ratios like Hannong Chemicals’ to be considered reasonable.

Retrospectively, the last year delivered a decent 9.7% gain to the company’s bottom line. Ultimately though, it couldn’t turn around the poor performance of the prior period, with EPS shrinking 54% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 36% over the next year, which really puts the company’s recent medium-term earnings decline into perspective.

With this information, we find it concerning that Hannong Chemicals is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren’t willing to let go of their stock at any price. 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 Bottom Line On Hannong Chemicals’ P/E

It’s argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Hannong Chemicals revealed its shrinking earnings over the medium-term aren’t impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

Before you take the next step, you should know about the 2 warning signs for Hannong Chemicals (1 is a bit unpleasant!) that we have uncovered.

If these risks are making you reconsider your opinion on Hannong Chemicals, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.