Some Linical Co., Ltd. (TSE:2183) Shareholders Look For Exit As Shares Take 26% Pounding

The Linical Co., Ltd. (TSE:2183) 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 48% in that time.

In spite of the heavy fall in price, it's still not a stretch to say that Linical's price-to-earnings (or "P/E") ratio of 12.9x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Linical 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 moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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How Is Linical's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Linical's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 182% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.7% per annum as estimated by the lone analyst watching the company. That's not great when the rest of the market is expected to grow by 10% each year.

In light of this, it's somewhat alarming that Linical's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

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

Following Linical's share price tumble, its P/E is now hanging on to the median market P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Linical's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about this 1 warning sign we've spotted with Linical.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.