Naspers Limited's (JSE:NPN) Share Price Not Quite Adding Up
With a median price-to-earnings (or "P/E") ratio of close to 9x in South Africa, you could be forgiven for feeling indifferent about Naspers Limited's (JSE:NPN) P/E ratio of 7.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's superior to most other companies of late, Naspers has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Naspers.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like Naspers' is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 107% gain to the company's bottom line. Pleasingly, EPS has also lifted 248% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the ten analysts covering the company suggest earnings growth is heading into negative territory, declining 5.8% each year over the next three years. That's not great when the rest of the market is expected to grow by 12% per annum.
In light of this, it's somewhat alarming that Naspers' P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.
What We Can Learn From Naspers' P/E?
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.
We've established that Naspers currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Before you take the next step, you should know about the 2 warning signs for Naspers (1 is potentially serious!) that we have uncovered.
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.
