Earnings Not Telling The Story For JYP Entertainment Corporation (KOSDAQ:035900)

There wouldn't be many who think JYP Entertainment Corporation's (KOSDAQ:035900) price-to-earnings (or "P/E") ratio of 14.4x 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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Recent times have been pleasing for JYP Entertainment as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for JYP Entertainment

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

What Are Growth Metrics Telling Us About The P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 138%. The latest three year period has also seen an excellent 106% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 1.0% per annum over the next three years. Meanwhile, the broader market is forecast to expand by 18% per annum, which paints a poor picture.

In light of this, it's somewhat alarming that JYP Entertainment's P/E sits in line with 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. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that JYP Entertainment currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for JYP Entertainment you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.