Yalla Group Limited (NYSE:YALA) Could Be Riskier Than It Looks

With a price-to-earnings (or "P/E") ratio of 6.4x Yalla Group Limited (NYSE:YALA) may be sending very bullish signals at the moment, given that almost half of all companies in the United States have P/E ratios greater than 15x and even P/E's higher than 29x 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.

Yalla Group's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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How Is Yalla Group's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Yalla Group's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a worthy increase of 10%. The latest three year period has also seen an excellent 156% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 20% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 7.2%, which is noticeably less attractive.

With this information, we find it odd that Yalla Group is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Yalla Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You always need to take note of risks, for example - Yalla Group has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Yalla Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.