Market Cool On SOMAR Corporation's (TSE:8152) Earnings Pushing Shares 34% Lower

SOMAR Corporation (TSE:8152) shares have had a horrible month, losing 34% after a relatively good period beforehand. Longer-term, the stock has been solid despite a difficult 30 days, gaining 25% in the last year.

Although its price has dipped substantially, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may still consider SOMAR as a highly attractive investment with its 3.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

SOMAR certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 SOMAR

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SOMAR's earnings, revenue and cash flow.

Is There Any Growth For SOMAR?

The only time you'd be truly comfortable seeing a P/E as depressed as SOMAR's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 160% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 274% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 10% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that SOMAR is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From SOMAR's P/E?

SOMAR's P/E looks about as weak as its stock price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of SOMAR revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 3 warning signs for SOMAR that you need to take into consideration.

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.