Remixpoint, Inc.'s (TSE:3825) 28% Share Price Plunge Could Signal Some Risk

Unfortunately for some shareholders, the Remixpoint, Inc. (TSE:3825) share price has dived 28% in the last thirty days, prolonging recent pain. The good news is that in the last year, the stock has shone bright like a diamond, gaining 115%.

In spite of the heavy fall in price, Remixpoint may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 38.9x, since almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 8x are not unusual. 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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Earnings have risen at a steady rate over the last year for Remixpoint, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Remixpoint

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

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Remixpoint's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.2% last year. Still, lamentably EPS has fallen 58% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 9.6% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Remixpoint's P/E sits above the majority of other companies. 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 Remixpoint's P/E

Even after such a strong price drop, Remixpoint's P/E still exceeds the rest of the market significantly. 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 Remixpoint 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Remixpoint (at least 1 which is potentially serious), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Remixpoint, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.