Tera Probe, Inc. (TSE:6627) Looks Inexpensive After Falling 31% But Perhaps Not Attractive Enough

Tera Probe, Inc. (TSE:6627) shares have had a horrible month, losing 31% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 61% share price decline.

After such a large drop in price, Tera Probe may be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.9x, since almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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While the market has experienced earnings growth lately, Tera Probe's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Tera Probe

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Is There Any Growth For Tera Probe?

In order to justify its P/E ratio, Tera Probe would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 96% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 1.8% each year as estimated by the sole analyst watching the company. With the market predicted to deliver 9.5% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Tera Probe is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Having almost fallen off a cliff, Tera Probe's share price has pulled its P/E way down as well. 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.

As we suspected, our examination of Tera Probe's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Tera Probe you should know about.

If you're unsure about the strength of Tera Probe's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.