Not Many Are Piling Into YE DIGITAL Corporation (TSE:2354) Stock Yet As It Plummets 28%

YE DIGITAL Corporation (TSE:2354) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

After such a large drop in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider YE DIGITAL as an attractive investment with its 9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

YE DIGITAL certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for YE DIGITAL

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 YE DIGITAL's earnings, revenue and cash flow.

How Is YE DIGITAL's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like YE DIGITAL's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 78%. The strong recent performance means it was also able to grow EPS by 60% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.8% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that YE DIGITAL is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From YE DIGITAL's P/E?

YE DIGITAL's recently weak share price has pulled its P/E below most other companies. 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.

We've established that YE DIGITAL currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for YE DIGITAL (1 is a bit concerning) you should be aware of.

Of course, you might also be able to find a better stock than YE DIGITAL. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com