Why We're Not Concerned Yet About J-Stream Inc.'s (TSE:4308) 26% Share Price Plunge

The J-Stream Inc. (TSE:4308) share price has fared very poorly over the last month, falling by a substantial 26%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 46% in that time.

Even after such a large drop in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may still consider J-Stream as a stock to avoid entirely with its 23.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

J-Stream hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for J-Stream

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, J-Stream would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 61%. As a result, earnings from three years ago have also fallen 84% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the lone analyst watching the company. With the market only predicted to deliver 9.6% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why J-Stream 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 Key Takeaway

A significant share price dive has done very little to deflate J-Stream's very lofty P/E. 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 J-Stream 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.

Before you take the next step, you should know about the 4 warning signs for J-Stream (1 doesn't sit too well with us!) that we have uncovered.

If these risks are making you reconsider your opinion on J-Stream, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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