DreamArts Corporation (TSE:4811) Shares May Have Slumped 25% But Getting In Cheap Is Still Unlikely

DreamArts Corporation (TSE:4811) shares have had a horrible month, losing 25% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Even after such a large drop in price, DreamArts may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.7x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, DreamArts has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for DreamArts

Keen to find out how analysts think DreamArts' future stacks up against the industry? In that case, our free report is a great place to start .

Is There Enough Growth For DreamArts?

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

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 5,097% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 8.7% per annum as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 9.7% per year, which is not materially different.

In light of this, it's curious that DreamArts' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From DreamArts' P/E?

There's still some solid strength behind DreamArts' P/E, if not its share price lately. 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.

Our examination of DreamArts' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

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