Inter Action Corporation (TSE:7725) Not Doing Enough For Some Investors As Its Shares Slump 25%

Inter Action Corporation (TSE:7725) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 15% in the last year.

Although its price has dipped substantially, Inter Action's price-to-earnings (or "P/E") ratio of 12x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 22x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Inter Action as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Inter Action

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

Is There Any Growth For Inter Action?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 16% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 1.5% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 6.7% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 9.8% growth forecast for the broader market.

In light of this, it's understandable that Inter Action's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The softening of Inter Action's shares means its P/E is now sitting at a pretty low level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Inter Action's analyst forecasts revealed that its inferior earnings outlook 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Inter Action (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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