What You Can Learn From pluszero, Inc.'s (TSE:5132) P/E After Its 34% Share Price Crash

pluszero, Inc. (TSE:5132) shareholders won't be pleased to see that the share price has had a very rough month, dropping 34% and undoing the prior period's positive performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 9.7% over the last twelve months.

Even after such a large drop in price, pluszero's price-to-earnings (or "P/E") ratio of 71.9x might still make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. 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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With earnings growth that's superior to most other companies of late, pluszero 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.

View our latest analysis for pluszero

If you'd like to see what analysts are forecasting going forward, you should check out our free report on pluszero.

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 90%. However, this wasn't enough as the latest three year period has seen a very unpleasant 30% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 73% over the next year. That's shaping up to be materially higher than the 9.1% growth forecast for the broader market.

In light of this, it's understandable that pluszero's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From pluszero's P/E?

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

We've established that pluszero maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for pluszero that we have uncovered.

If you're unsure about the strength of pluszero's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.