With a price-to-earnings (or “P/E”) ratio of 23x Gravity Co., Ltd. (NASDAQ:GRVY) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E’s lower than 10x are not unusual. Although, it’s not wise to just take the P/E at face value as there may be an explanation why it’s lofty.
For instance, Gravity’s receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Gravity will help you shine a light on its historical performance.
Does Growth Match The High P/E?
The only time you’d be truly comfortable seeing a P/E as high as Gravity’s is when the company’s growth is on track to outshine the market.
Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 39%. Even so, admirably EPS has lifted 241% in aggregate from three years ago, notwithstanding the last 12 months. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been more than adequate for the company.
Weighing that recent medium-term earnings trajectory against the broader market’s one-year forecast for expansion of 4.3% shows it’s noticeably more attractive on an annualised basis.
In light of this, it’s understandable that Gravity’s P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
The Bottom Line On Gravity’s 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.
We’ve established that Gravity maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
We don’t want to rain on the parade too much, but we did also find 1 warning sign for Gravity that you need to be mindful of.
If you’re unsure about the strength of Gravity’s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
This article by Simply Wall St is general in nature. 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.