NagaCorp Ltd. (HKG:3918) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 38% share price drop.
In spite of the heavy fall in price, NagaCorp's price-to-earnings (or "P/E") ratio of 13.6x might still make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 10x and even P/E's below 6x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
While the market has experienced earnings growth lately, NagaCorp's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
See our latest analysis for NagaCorp
How Is NagaCorp's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like NagaCorp's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 38% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 126% as estimated by the three analysts watching the company. With the market only predicted to deliver 18%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that NagaCorp's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From NagaCorp's P/E?
There's still some solid strength behind NagaCorp's P/E, if not its share price lately. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that NagaCorp maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for NagaCorp that we have uncovered.
If these risks are making you reconsider your opinion on NagaCorp, 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.