Mgame Corp. (KOSDAQ:058630) Held Back By Insufficient Growth Even After Shares Climb 26%

Mgame Corp. (KOSDAQ:058630) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 8.7% isn't as impressive.

In spite of the firm bounce in price, given about half the companies in Korea have price-to-earnings ratios (or "P/E's") above 12x, you may still consider Mgame as an attractive investment with its 7.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, Mgame's receding earnings in recent times would have to be some food for thought. 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.

Check out our latest analysis for Mgame

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Mgame will help you shine a light on its historical performance.

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

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 29%. Even so, admirably EPS has lifted 55% in aggregate from three years ago, notwithstanding the last 12 months. 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.

This is in contrast to the rest of the market, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Mgame's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Despite Mgame's shares building up a head of steam, its P/E still lags 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 Mgame maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Mgame you should be aware of.

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).

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.