There's Reason For Concern Over Lotte Wellfood Co.,Ltd's (KRX:280360) Price

With a median price-to-earnings (or "P/E") ratio of close to 12x in Korea, you could be forgiven for feeling indifferent about Lotte Wellfood Co.,Ltd's (KRX:280360) P/E ratio of 12.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Lotte WellfoodLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Lotte WellfoodLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Lotte WellfoodLtd.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Lotte WellfoodLtd's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 4.6% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 276% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 14% per year over the next three years. That's shaping up to be materially lower than the 17% per year growth forecast for the broader market.

With this information, we find it interesting that Lotte WellfoodLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Lotte WellfoodLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Lotte WellfoodLtd you should be aware of, and 1 of them is a bit concerning.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.