Take Care Before Jumping Onto Sinfonia Technology Co.,Ltd. (TSE:6507) Even Though It's 36% Cheaper

Sinfonia Technology Co.,Ltd. (TSE:6507) shareholders that were waiting for something to happen have been dealt a blow with a 36% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 49% in the last year.

In spite of the heavy fall in price, Sinfonia TechnologyLtd's price-to-earnings (or "P/E") ratio of 8.7x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x 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 limited.

Sinfonia TechnologyLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Sinfonia TechnologyLtd

Keen to find out how analysts think Sinfonia TechnologyLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Sinfonia TechnologyLtd's Growth Trending?

Sinfonia TechnologyLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than 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 7.3%. Still, the latest three year period has seen an excellent 114% 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.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 17% over the next year. Meanwhile, the rest of the market is forecast to only expand by 9.8%, which is noticeably less attractive.

In light of this, it's peculiar that Sinfonia TechnologyLtd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Sinfonia TechnologyLtd's P/E

The softening of Sinfonia TechnologyLtd's shares means its P/E is now sitting at a pretty low level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Sinfonia TechnologyLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It is also worth noting that we have found 2 warning signs for Sinfonia TechnologyLtd that you need to take into consideration.

If you're unsure about the strength of Sinfonia TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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