What Nepes Corporation's (KOSDAQ:033640) 50% Share Price Gain Is Not Telling You

The Nepes Corporation (KOSDAQ:033640) share price has done very well over the last month, posting an excellent gain of 50%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 26% in the last twelve months.

After such a large jump in price, Nepes' price-to-earnings (or "P/E") ratio of 18x might make it look like a sell right now compared to the market in Korea, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Nepes 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 Nepes

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

Is There Enough Growth For Nepes?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings growth is heading into negative territory, declining 1.1% each year over the next three years. Meanwhile, the broader market is forecast to expand by 17% per year, which paints a poor picture.

In light of this, it's alarming that Nepes' P/E sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Nepes' shares has lifted the company's P/E to a fairly high level. 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 Nepes 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Nepes (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Nepes' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.