Long term investing can be life changing when you buy and hold the truly great businesses. And highest quality companies can see their share prices grow by huge amounts. To wit, the Gravity Co., Ltd. (NASDAQ:GRVY) share price has soared 1604% over five years. This just goes to show the value creation that some businesses can achieve. And in the last month, the share price has gained 23%. We note that Gravity reported its financial results recently; luckily, you can catch up on the latest revenue and profit numbers in our company report.
We love happy stories like this one. The company should be really proud of that performance!
In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.
During the five years of share price growth, Gravity moved from a loss to profitability. That kind of transition can be an inflection point that justifies a strong share price gain, just as we have seen here. Given that the company made a profit three years ago, but not five years ago, it is worth looking at the share price returns over the last three years, too. We can see that the Gravity share price is up 286% in the last three years. In the same period, EPS is up 293% per year. This EPS growth is higher than the 57% average annual increase in the share price over the same three years. Therefore, it seems the market has moderated its expectations for growth, somewhat. This cautious sentiment is reflected in its (fairly low) P/E ratio of 7.66.
You can see below how EPS has changed over time (discover the exact values by clicking on the image).
Dive deeper into Gravity’s key metrics by checking this interactive graph of Gravity’s earnings, revenue and cash flow.
A Different Perspective
We regret to report that Gravity shareholders are down 42% for the year. Unfortunately, that’s worse than the broader market decline of 0.8%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there’s a good opportunity. On the bright side, long term shareholders have made money, with a gain of 76% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Consider for instance, the ever-present spectre of investment risk. We’ve identified 1 warning sign with Gravity , and understanding them should be part of your investment process.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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