Some TRANSACTION CO.,Ltd. (TSE:7818) Shareholders Look For Exit As Shares Take 27% Pounding

TRANSACTION CO.,Ltd. (TSE:7818) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 11% in the last year.

Although its price has dipped substantially, it's still not a stretch to say that TRANSACTIONLtd's price-to-earnings (or "P/E") ratio of 13.6x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's superior to most other companies of late, TRANSACTIONLtd has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for TRANSACTIONLtd

Want the full picture on analyst estimates for the company? Then our free report on TRANSACTIONLtd will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The P/E?

TRANSACTIONLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. Pleasingly, EPS has also lifted 71% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 6.5% per year over the next three years. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that TRANSACTIONLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

TRANSACTIONLtd's plummeting stock price has brought its P/E right back to the rest of the market. 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 TRANSACTIONLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for TRANSACTIONLtd with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.