Even With A 30% Surge, Cautious Investors Are Not Rewarding Gravity Co., Ltd.'s (NASDAQ:GRVY) Performance Completely

Gravity Co., Ltd. (NASDAQ:GRVY) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

Even after such a large jump in price, Gravity may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 6.9x, since almost half of all companies in the United States have P/E ratios greater than 17x and even P/E's higher than 32x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Gravity has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for Gravity

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 Gravity's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 19%. The latest three year period has also seen an excellent 59% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Gravity's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Shares in Gravity are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

Our examination of Gravity revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

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

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).

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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.