Delivery Consulting Inc.'s (TSE:9240) Popularity With Investors Under Threat As Stock Sinks 28%

Delivery Consulting Inc. (TSE:9240) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Still, a bad month hasn't completely ruined the past year with the stock gaining 27%, which is great even in a bull market.

In spite of the heavy fall in price, Delivery Consulting's price-to-earnings (or "P/E") ratio of 21.1x might still make it look like a 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 9x 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 as high as it is.

With earnings growth that's exceedingly strong of late, Delivery Consulting has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Delivery Consulting

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Delivery Consulting would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 104% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 35% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.9% shows it's an unpleasant look.

In light of this, it's alarming that Delivery Consulting'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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Delivery Consulting's P/E?

Delivery Consulting's P/E hasn't come down all the way after its stock plunged. 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 Delivery Consulting currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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 3 warning signs with Delivery Consulting (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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