Market Cool On Abalance Corporation's (TSE:3856) Earnings Pushing Shares 25% Lower

To the annoyance of some shareholders, Abalance Corporation (TSE:3856) shares are down a considerable 25% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 82% loss during that time.

Since its price has dipped substantially, Abalance may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.7x, since almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 24x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's exceedingly strong of late, Abalance has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Abalance

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Abalance's earnings, revenue and cash flow.

How Is Abalance's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Abalance's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 180%. Pleasingly, EPS has also lifted 1,043% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Abalance's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Abalance's P/E looks about as weak as its stock price lately. 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.

We've established that Abalance currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Abalance (including 1 which doesn't sit too well with us).

Of course, you might also be able to find a better stock than Abalance. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.