Risks to shareholder returns are high at these prices for Golden Matrix Group, Inc. (NASDAQ: GMGI)

Golden Matrix Group, Inc. (NASDAQ:GMGI) a price/earnings ratio (or “P/E”) of 58.5x could give the impression that it is a strong sell-off at the moment compared to the market in the United States, where about half of companies have P/E ratios below 14x and even P/E below 8x are quite common. Nevertheless, we would need to dig a little deeper to determine if there is a rational basis for the very high P/E.

The recent times have been quite beneficial for Golden Matrix Group as its profits have increased very rapidly. The P/E is likely high as investors believe this strong earnings growth will be enough to outperform the market in the near future. Otherwise, existing shareholders might be a bit worried about the viability of the share price.

NasdaqCM: GMGI price based on prior earnings September 15, 2022

Want a complete picture of company profits, revenue, and cash flow? Then our free report on Golden Matrix Group will help you shed light on its historical performance.

What do the growth indicators tell us about the high P/E?

Golden Matrix Group’s P/E ratio would be typical of a company that is expected to generate very strong growth and, above all, much better than the market.

Looking back, last year generated an exceptional gain of 101% on the company’s bottom line. However, that wasn’t enough, as the last three-year period saw a very unpleasant 34% drop in EPS overall. So, unfortunately, we have to acknowledge that the company hasn’t done a great job of growing earnings over this period.

Unlike the company, the rest of the market is expected to grow 9.3% over the next year, which really puts the company’s recent decline in mid-term earnings into perspective.

In light of this, it is alarming that Golden Matrix Group’s P/E sits above the majority of other companies. Apparently, many of the company’s investors are much more optimistic than suggested lately and aren’t willing to give up their shares at any cost. Only the most daring would assume that these prices are sustainable, as the continuation of recent earnings trends should weigh heavily on the stock price going forward.

The Key Takeaway

It’s not a good idea to use the price-earnings ratio alone to determine whether you should sell your shares, but it can be a handy guide to the company’s future prospects.

Our review of Golden Matrix Group revealed that its mid-term earnings decline is not impacting its high P/E as much as we would have expected, given that the market is set to grow. Right now, we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to sustain such positive sentiment for long. If recent medium-term earnings trends continue, shareholders’ investments will be exposed to significant risk and potential investors may pay an excessive premium.

We don’t want to rain too much on the parade, but we also found 1 warning sign for Golden Matrix Group which you must take into account.

Sure, you might also be able to find a better stock than Golden Matrix Group. So you might want to see this free collection of other companies with P/Es less than 20x and strong earnings growth.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

About Florence L. Silvia

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