Adventure, Inc. (TSE:6030) Stocks Pounded By 28% But Not Lagging Market On Growth Or Pricing

The Adventure, Inc. (TSE:6030) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 49% share price drop.

In spite of the heavy fall in price, Adventure's price-to-earnings (or "P/E") ratio of 36.5x might still make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Adventure hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Adventure

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Adventure.

Does Growth Match The High P/E?

Adventure's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 59% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 9.3% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 176% as estimated by the sole analyst watching the company. With the market only predicted to deliver 9.7%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Adventure'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 Adventure's P/E?

A significant share price dive has done very little to deflate Adventure's very lofty P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Adventure 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. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Adventure (at least 1 which is concerning), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Adventure. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.