The Market Doesn't Like What It Sees From Tera Probe, Inc.'s (TSE:6627) Earnings Yet As Shares Tumble 25%

Unfortunately for some shareholders, the Tera Probe, Inc. (TSE:6627) share price has dived 25% in the last thirty days, prolonging recent pain. The recent drop has obliterated the annual return, with the share price now down 6.3% over that longer period.

After such a large drop in price, Tera Probe may be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.4x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Tera Probe as its earnings have been rising slower than most other companies. It seems that many are expecting the uninspiring 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.

View our latest analysis for Tera Probe

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

How Is Tera Probe's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 5.0%. Pleasingly, EPS has also lifted 1,024% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 2.9% per annum over the next three years. With the market predicted to deliver 9.7% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Tera Probe is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

Tera Probe's P/E has taken a tumble along with its share price. 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 Tera Probe's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Tera Probe (2 are potentially serious) you should be aware of.

You might be able to find a better investment than Tera Probe. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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