Some Shareholders Feeling Restless Over NEXON Games Co., Ltd.'s (KOSDAQ:225570) P/E Ratio

NEXON Games Co., Ltd.'s (KOSDAQ:225570) price-to-earnings (or "P/E") ratio of 33.6x 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 11x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

NEXON Games certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for NEXON Games

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

Is There Enough Growth For NEXON Games?

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

Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 12% over the next year. That's not great when the rest of the market is expected to grow by 26%.

In light of this, it's alarming that NEXON Games' P/E sits above 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 heavily on the share price eventually.

What We Can Learn From NEXON Games' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that NEXON Games currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for NEXON Games with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than NEXON Games. 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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