CL Holdings Inc. (TSE:4286) Shares Slammed 32% But Getting In Cheap Might Be Difficult Regardless

CL Holdings Inc. (TSE:4286) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 15% in the last year.

In spite of the heavy fall in price, CL Holdings may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.1x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for CL Holdings as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for CL Holdings

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, CL Holdings would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 480% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 60% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 13% per annum as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.3% each year, which is noticeably less attractive.

With this information, we can see why CL Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

There's still some solid strength behind CL Holdings' P/E, if not its share price lately. 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 CL Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware CL Holdings is showing 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

Of course, you might also be able to find a better stock than CL Holdings. 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.