CREAL Inc. (TSE:2998) Shares Slammed 30% But Getting In Cheap Might Be Difficult Regardless

To the annoyance of some shareholders, CREAL Inc. (TSE:2998) shares are down a considerable 30% in the last month, which continues a horrid run for the company. Indeed, the recent drop has reduced its annual gain to a relatively sedate 6.3% over the last twelve months.

In spite of the heavy fall in price, CREAL may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 21.6x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 10x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, CREAL has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for CREAL

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on CREAL will help you shine a light on its historical performance.

Does Growth Match The High P/E?

CREAL's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 78% last year. The strong recent performance means it was also able to grow EPS by 283% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.3% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that CREAL's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

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

A significant share price dive has done very little to deflate CREAL's very lofty P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that CREAL maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for CREAL (1 is potentially serious!) that you should be aware of.

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).

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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.