What NexgenRx Inc.'s (CVE:NXG) 32% Share Price Gain Is Not Telling You

By
Simply Wall St
Published
August 23, 2021
TSXV:NXG
Source: Shutterstock

NexgenRx Inc. (CVE:NXG) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. The annual gain comes to 137% following the latest surge, making investors sit up and take notice.

After such a large jump in price, NexgenRx may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.1x, since almost half of all companies in Canada have P/E ratios under 12x and even P/E's lower than 5x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

NexgenRx certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for NexgenRx

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TSXV:NXG Price Based on Past Earnings August 24th 2021
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on NexgenRx's earnings, revenue and cash flow.

How Is NexgenRx's Growth Trending?

In order to justify its P/E ratio, NexgenRx would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 306% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 13% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that NexgenRx's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

NexgenRx shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of NexgenRx revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for NexgenRx that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.

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