PAL GROUP Holdings CO., LTD.'s (TSE:2726) 28% Cheaper Price Remains In Tune With Earnings

PAL GROUP Holdings CO., LTD. (TSE:2726) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 58% in the last year.

In spite of the heavy fall in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may still consider PAL GROUP Holdings as a stock to avoid entirely with its 26.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Recent times have been advantageous for PAL GROUP Holdings as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for PAL GROUP Holdings

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

Is There Enough Growth For PAL GROUP Holdings?

In order to justify its P/E ratio, PAL GROUP Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. The latest three year period has also seen an excellent 84% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 17% each year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 9.6% per annum growth forecast for the broader market.

With this information, we can see why PAL GROUP Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

A significant share price dive has done very little to deflate PAL GROUP Holdings' very lofty P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of PAL GROUP Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for PAL GROUP Holdings that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.