The Nature Holdings Co., Ltd.'s (KOSDAQ:298540) Share Price Boosted 29% But Its Business Prospects Need A Lift Too

The Nature Holdings Co., Ltd. (KOSDAQ:298540) shares have continued their recent momentum with a 29% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.0% in the last twelve months.

Even after such a large jump in price, Nature Holdings may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.6x, since almost half of all companies in Korea have P/E ratios greater than 13x and even P/E's higher than 27x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

As an illustration, earnings have deteriorated at Nature Holdings over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Nature Holdings

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 Nature Holdings' earnings, revenue and cash flow.

How Is Nature Holdings' Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Nature Holdings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 54%. This means it has also seen a slide in earnings over the longer-term as EPS is down 69% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 28% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Nature Holdings is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Nature Holdings' P/E?

Despite Nature Holdings' shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Nature Holdings revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Nature Holdings (1 is a bit concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Nature Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.