NagaCorp Ltd. (HKG:3918) Might Not Be As Mispriced As It Looks

There wouldn't be many who think NagaCorp Ltd.'s (HKG:3918) price-to-earnings (or "P/E") ratio of 11.2x is worth a mention when the median P/E in Hong Kong is similar at about 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's superior to most other companies of late, NagaCorp has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for NagaCorp

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Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like NagaCorp's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 177% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 18% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.

With this information, we find it interesting that NagaCorp is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On NagaCorp's 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 NagaCorp's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 1 warning sign for NagaCorp that you should be aware of.

Of course, you might also be able to find a better stock than NagaCorp. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.