JYP Entertainment Corporation's (KOSDAQ:035900) Popularity With Investors Is Clear

When close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 12x, you may consider JYP Entertainment Corporation (KOSDAQ:035900) as a stock to avoid entirely with its 30.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

JYP Entertainment 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for JYP Entertainment

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How Is JYP Entertainment's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like JYP Entertainment's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 34%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 93% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 33% per annum over the next three years. That's shaping up to be materially higher than the 17% per annum growth forecast for the broader market.

With this information, we can see why JYP Entertainment is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On JYP Entertainment's P/E

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.

As we suspected, our examination of JYP Entertainment's 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. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for JYP Entertainment you should know about.

You might be able to find a better investment than JYP Entertainment. 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.