Earnings Not Telling The Story For Intellex Co., Ltd. (TSE:8940) After Shares Rise 35%

Intellex Co., Ltd. (TSE:8940) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 43%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Intellex's P/E ratio of 14x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Intellex certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Intellex

Although there are no analyst estimates available for Intellex, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Intellex's Growth Trending?

Intellex's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 333% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 61% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 9.7% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that Intellex's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Intellex's P/E

Intellex's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Intellex revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 5 warning signs for Intellex you should be aware of, and 2 of them are significant.

If these risks are making you reconsider your opinion on Intellex, 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