Earnings Not Telling The Story For Openbase, Inc. (KOSDAQ:049480)

With a price-to-earnings (or "P/E") ratio of 37.8x Openbase, Inc. (KOSDAQ:049480) may be sending very bearish signals at the moment, given that almost half of all companies in Korea have P/E ratios under 21x and even P/E's lower than 11x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Openbase certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Openbase

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Openbase's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Openbase would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 79% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 98% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 47% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Openbase is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Openbase currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Openbase (1 is significant!) that we have uncovered.

You might be able to find a better investment than Openbase. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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