There's No Escaping Adtec Plasma Technology Co., Ltd.'s (TSE:6668) Muted Earnings Despite A 26% Share Price Rise

The Adtec Plasma Technology Co., Ltd. (TSE:6668) share price has done very well over the last month, posting an excellent gain of 26%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, Adtec Plasma Technology's price-to-earnings (or "P/E") ratio of 8.8x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

The earnings growth achieved at Adtec Plasma Technology over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Adtec Plasma Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Adtec Plasma Technology's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like Adtec Plasma Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 12%. EPS has also lifted 23% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Adtec Plasma Technology is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

Adtec Plasma Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Adtec Plasma Technology maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You always need to take note of risks, for example - Adtec Plasma Technology has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Adtec Plasma Technology'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.