Market Participants Recognise YG Entertainment Inc.'s (KOSDAQ:122870) Earnings Pushing Shares 26% Higher

Despite an already strong run, YG Entertainment Inc. (KOSDAQ:122870) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 202% in the last year.

Since its price has surged higher, given close to half the companies in Korea have price-to-earnings ratios (or "P/E's") below 14x, you may consider YG Entertainment as a stock to avoid entirely with its 58.2x 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.

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YG Entertainment certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for YG Entertainment

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Does Growth Match The High P/E?

YG Entertainment's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 150%. The strong recent performance means it was also able to grow EPS by 644% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 24% each year as estimated by the analysts watching the company. 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 YG 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 Final Word

Shares in YG Entertainment have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that YG Entertainment maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

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

Of course, you might also be able to find a better stock than YG Entertainment. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.