Naspers Limited's (JSE:NPN) Earnings Haven't Escaped The Attention Of Investors

It's not a stretch to say that Naspers Limited's (JSE:NPN) price-to-earnings (or "P/E") ratio of 9.2x right now seems quite "middle-of-the-road" compared to the market in South Africa, where the median P/E ratio is around 8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Naspers certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

Check out our latest analysis for Naspers

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Does Growth Match The P/E?

In order to justify its P/E ratio, Naspers would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 87%. Still, incredibly EPS has fallen 19% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 14% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 14% per year, which is not materially different.

With this information, we can see why Naspers is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Naspers' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Naspers (at least 1 which can't be ignored), and understanding them should be part of your investment process.

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

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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.