Investors Give Wacom Co., Ltd. (TSE:6727) Shares A 32% Hiding

Wacom Co., Ltd. (TSE:6727) shareholders won't be pleased to see that the share price has had a very rough month, dropping 32% and undoing the prior period's positive performance. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 10% share price drop.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Wacom's P/E ratio of 15.1x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Wacom has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Wacom

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

How Is Wacom's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 281% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 46% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 25% per annum as estimated by the two analysts watching the company. With the market only predicted to deliver 9.6% each year, the company is positioned for a stronger earnings result.

In light of this, it's curious that Wacom's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

Following Wacom's share price tumble, its P/E is now hanging on to the median market P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Wacom currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 3 warning signs for Wacom (1 doesn't sit too well with us!) that we have uncovered.

If you're unsure about the strength of Wacom'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com