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Getting into Hanon systems cheaply (KRX:018880) can be difficult

Hanon systems (KRX:018880) a price-to-earnings ratio (or “P/E”) of 67.9x could make it look like a strong sell right now compared to the market in Korea, where about half of companies have price-to-earnings ratios below 13x and even price-to-earnings ratios below 7x are quite common. Although it is not wise to take the price-to-earnings ratio at face value as there may be an explanation as to why it is so lofty.

Hanon Systems has certainly done a good job lately, as its earnings growth has been positive while most other companies have seen their profits decline. It appears many expect the company to continue to defy broader market adversity, which has increased investors’ willingness to pay for the stock. You’d really hope so, otherwise you’d be paying a pretty high price for no particular reason.

Check out our latest analysis for Hanon Systems

KOSE:A018880 Price-to-earnings ratio versus sector May 5, 2024

Want to know how analysts think Hanon Systems’ future compares to the industry? In that case our free report is a good starting point.

How is Hanon Systems growing?

To justify the price/earnings ratio, Hanon Systems would have to achieve excellent growth that easily exceeds the market.

Looking at the past year of earnings growth, the company posted a whopping 149% increase. However, this was not enough as the last three years saw a very unpleasant 54% drop in earnings per share. So unfortunately, we have to acknowledge that the company hasn’t done a good job of growing profits over that time.

In terms of prospects, the next three years should generate growth of 92% per year, as estimated by the analysts covering the company. That appears to be significantly higher than the 21% annual growth forecast for the broader market.

With this information, we can see why Hanon Systems is trading at such a high price-to-earnings ratio compared to the market. Apparently shareholders are not keen to abolish something that potentially promises a more prosperous future.

The final result of Hanon Systems’ price-earnings ratio

In general, we prefer to limit the use of the price-to-earnings ratio to assessing what the market thinks about the overall health of a company.

We found that Hanon Systems maintains its high price-to-earnings ratio on the basis that its forecast growth is, as expected, higher than that of the broader market. At this point, shareholders are comfortable with the price-to-earnings ratio as they are confident that future profits are not at risk. It’s hard to see the share price falling sharply in the near future under these conditions.

It is always necessary to consider the ever-present specter of investment risk. We have identified it 2 warning signs at Hanon Systemsand understanding this should be part of your investment process.

Naturally, You might find a fantastic investment by looking at a few good candidates. So take a look at this free list of companies with a strong growth trajectory, trading at a low price/earnings.

Valuation is complex, but we help make it simple.

Find out if Hanon Systems is potentially over or undervalued by reviewing our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

View the Free Analysis

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.