What NHN KCP Corp.'s (KOSDAQ:060250) 29% Share Price Gain Is Not Telling You

NHN KCP Corp. (KOSDAQ:060250) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The last month tops off a massive increase of 140% in the last year.

Although its price has surged higher, there still wouldn't be many who think NHN KCP's price-to-earnings (or "P/E") ratio of 16.5x is worth a mention when the median P/E in Korea is similar at about 15x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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The recently shrinking earnings for NHN KCP have been in line with the market. The P/E is probably moderate because investors think the company's earnings trend will continue to follow the rest of the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. At the very least, you'd be hoping that earnings don't accelerate downwards if your plan is to pick up some stock while it's not in favour.

See our latest analysis for NHN KCP

If you'd like to see what analysts are forecasting going forward, you should check out our free report on NHN KCP.

Does Growth Match The P/E?

In order to justify its P/E ratio, NHN KCP would need to produce growth that's similar to the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 2.6%. Still, the latest three year period has seen an excellent 39% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 10% per annum as estimated by the eight analysts watching the company. That's shaping up to be materially lower than the 20% per year growth forecast for the broader market.

With this information, we find it interesting that NHN KCP is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

NHN KCP appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that NHN KCP currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware NHN KCP is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than NHN KCP. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.