CHANGE Holdings,Inc.'s (TSE:3962) Shares May Have Run Too Fast Too Soon

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider CHANGE Holdings,Inc. (TSE:3962) as a stock to avoid entirely with its 28.1x 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.

For instance, CHANGE HoldingsInc's receding earnings in recent times would have to be some food for thought. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for CHANGE HoldingsInc

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on CHANGE HoldingsInc will help you shine a light on its historical performance.

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

In order to justify its P/E ratio, CHANGE HoldingsInc would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 19% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 12% 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 CHANGE HoldingsInc'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 CHANGE HoldingsInc's P/E

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 CHANGE HoldingsInc currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for CHANGE HoldingsInc you should be aware of.

Of course, you might also be able to find a better stock than CHANGE HoldingsInc. 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.