There's Reason For Concern Over Games Workshop Group PLC's (LON:GAW) Massive 26% Price Jump

Games Workshop Group PLC (LON:GAW) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 57%.

Since its price has surged higher, Games Workshop Group's price-to-earnings (or "P/E") ratio of 29.4x might make it look like a strong sell right now compared to the market in the United Kingdom, where around half of the companies have P/E ratios below 15x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

We've discovered 1 warning sign about Games Workshop Group. View them for free.

With earnings growth that's superior to most other companies of late, Games Workshop Group has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Games Workshop Group

Keen to find out how analysts think Games Workshop Group's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Games Workshop Group's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Games Workshop Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 46% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 0.4% over the next year. With the market predicted to deliver 18% growth , that's a disappointing outcome.

In light of this, it's alarming that Games Workshop Group's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Games Workshop Group's P/E

Shares in Games Workshop Group have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Games Workshop Group's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Games Workshop Group you should know about.

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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