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22 August 2020 22:31

Friends Rachel Casualty Connie Beauchamp

(NASDAQ:GRVY) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 10x 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 lofty. For instance, Gravity's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Does Growth Match The High P/E? The only time you'd be truly comfortable seeing a P/E as high as Gravity's is when the company's growth is on track to outshine the market. Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 39%. Even so, admirably EPS has lifted 241% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 4.3% shows it's noticeably more attractive on an annualised basis. In light of this, it's understandable that Gravity's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock. The Bottom Line On Gravity's P/E 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 Gravity maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price. We don't want to rain on the parade too much, but we did also find 1 warning sign for Gravity that you need to be mindful of. If you're unsure about the strength of Gravity's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed. With a price-to-earnings (or "P/E") ratio of 23x Gravity Co., Ltd. (NASDAQ:GRVY) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified. For example, consider that Gravity's financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason. View our latest analysis for Gravity How Is Gravity's Growth Trending? Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Gravity will help you shine a light on its historical performance. Gravity's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market. Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 241% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth. Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 4.3% shows it's noticeably more attractive on an annualised basis. With this information, we can see why Gravity is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse. The Key Takeaway 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. As we suspected, our examination of Gravity revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances. Before you settle on your opinion, we've discovered 1 warning sign for Gravity that you should be aware of. Of course, you might also be able to find a better stock than Gravity. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly. Promoted If you're looking to trade Gravity, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. This article by Simply Wall St is general in nature. 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. *Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020 Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email [email protected]