Forside Co.,Ltd.'s (TSE:2330) 32% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

Forside Co.,Ltd. (TSE:2330) shareholders that were waiting for something to happen have been dealt a blow with a 32% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 64% share price decline.

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 12x, you may still consider ForsideLtd as a stock to avoid entirely with its 73.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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For example, consider that ForsideLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for ForsideLtd

Although there are no analyst estimates available for ForsideLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

ForsideLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 51%. As a result, earnings from three years ago have also fallen 43% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 10% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that ForsideLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On ForsideLtd's P/E

A significant share price dive has done very little to deflate ForsideLtd's very lofty P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of ForsideLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for ForsideLtd (1 shouldn't be ignored!) that we have uncovered.

You might be able to find a better investment than ForsideLtd. 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.