CLASSYS Inc.'s (KOSDAQ:214150) 29% Jump Shows Its Popularity With Investors

Despite an already strong run, CLASSYS Inc. (KOSDAQ:214150) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 115% following the latest surge, making investors sit up and take notice.

After such a large jump in price, CLASSYS' price-to-earnings (or "P/E") ratio of 53.3x might make it look like a strong sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 12x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

CLASSYS hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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Is There Enough Growth For CLASSYS?

The only time you'd be truly comfortable seeing a P/E as steep as CLASSYS' is when the company's growth is on track to outshine the market decidedly.

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 3.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 77% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 32% per annum over the next three years. With the market only predicted to deliver 17% per year, the company is positioned for a stronger earnings result.

With this information, we can see why CLASSYS is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On CLASSYS' P/E

Shares in CLASSYS have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of CLASSYS' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for CLASSYS with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on CLASSYS, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.