Serendip Holdings Co.,Ltd. (TSE:7318) Not Doing Enough For Some Investors As Its Shares Slump 39%

To the annoyance of some shareholders, Serendip Holdings Co.,Ltd. (TSE:7318) shares are down a considerable 39% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 22% share price drop.

In spite of the heavy fall in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Serendip HoldingsLtd as an attractive investment with its 9.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Serendip HoldingsLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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 out of favour.

View our latest analysis for Serendip HoldingsLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Serendip HoldingsLtd will help you shine a light on its historical performance.

How Is Serendip HoldingsLtd's Growth Trending?

In order to justify its P/E ratio, Serendip HoldingsLtd would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 66% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 9.8% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 9.8% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's understandable that Serendip HoldingsLtd's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Serendip HoldingsLtd's P/E?

Serendip HoldingsLtd's recently weak share price has pulled its P/E below most other companies. 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 Serendip HoldingsLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 4 warning signs for Serendip HoldingsLtd you should be aware of, and 1 of them shouldn't be ignored.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com