At these prices for Intops Co., Ltd. (KOSDAQ:049070), the risks to shareholder returns are elevated

When almost half of Korean companies have a price-to-earnings ratio (P/E) of less than 11x, you should consider Intops Co., Ltd. (KOSDAQ:049070) as a stock that may be worth avoiding with its P/E ratio of 16.1. Still, we would have to dig a little deeper to determine if there is a rational basis for the elevated P/E ratio.

With earnings declining more than the market recently, Intops has been very sluggish. Many may be expecting a significant rebound from the dismal earnings performance that has prevented the P/E ratio from collapsing. If not, existing shareholders may be very concerned about the sustainability of the share price.

Check out our latest analysis for Intops

Do you want the full picture of analyst estimates for the company? Then our free The Intops report will help you find out what's on the horizon.

What do growth metrics tell us about the high P/E ratio?

A P/E ratio as high as Intops' would only be truly comfortable if the company is on track to outperform the market growth.

First, if we look back, the company's earnings per share growth was not exactly exciting last year, as it posted a disappointing 56% decline. As a result, earnings from three years ago also fell by a total of 58%. Accordingly, shareholders were sobered about medium-term earnings growth rates.

According to the two analysts who cover the company, earnings per share are expected to grow 16% per year over the next three years, well below the 19% per year growth forecast for the overall market.

Given this information, we find it concerning that Intops is trading at a higher P/E than the market. It appears that many investors in the company are much more optimistic than analysts indicate and are not willing to offload their shares at any price. Only the bravest would assume that these prices are sustainable, as this level of earnings growth is likely to weigh heavily on the share price eventually.

The last word

It's not a good idea to use the price-to-earnings ratio alone to decide whether to sell your stock, but it can be a useful guide to the company's future prospects.

Our study of analyst forecasts for Intops found that the weaker earnings outlook is not affecting the high P/E nearly as much as we would have expected. When we see weak earnings prospects and slower-than-market growth, we suspect the share price could decline, driving the high P/E down. Unless these conditions improve significantly, it is very difficult to accept these prices as reasonable.

Before you form an opinion, we found out 2 warning signs for Intops that you should know.

If you are interested in P/E ratiosyou might want to see this free Collection of other companies with strong earnings growth and low P/E ratios.

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