Subdued Growth No Barrier To Dexerials Corporation (TSE:4980) With Shares Advancing 40%

Dexerials Corporation (TSE:4980) shares have had a really impressive month, gaining 40% after a shaky period beforehand. The annual gain comes to 120% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Dexerials' price-to-earnings (or "P/E") ratio of 18.1x might 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.

While the market has experienced earnings growth lately, Dexerials' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Dexerials

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

Is There Enough Growth For Dexerials?

Dexerials' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Even so, admirably EPS has lifted 390% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 7.4% per annum over the next three years. That's shaping up to be materially lower than the 9.9% per annum growth forecast for the broader market.

In light of this, it's alarming that Dexerials' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Dexerials' P/E?

Dexerials shares have received a push in the right direction, but its P/E is elevated too. 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 Dexerials' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 2 warning signs for Dexerials that you should be aware of.

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