Take Care Before Jumping Onto Almado, Inc. (TSE:4932) Even Though It's 35% Cheaper

The Almado, Inc. (TSE:4932) share price has fared very poorly over the last month, falling by a substantial 35%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 32% share price drop.

In spite of the heavy fall in price, it's still not a stretch to say that Almado's price-to-earnings (or "P/E") ratio of 11.5x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

The earnings growth achieved at Almado over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for Almado

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

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Almado's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 21%. The strong recent performance means it was also able to grow EPS by 105% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

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

In light of this, it's curious that Almado's P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Almado's plummeting stock price has brought its P/E right back to the rest of the market. 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 Almado currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

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

You might be able to find a better investment than Almado. 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.

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