Further Upside For Allied Telesis Holdings K.K. (TSE:6835) Shares Could Introduce Price Risks After 54% Bounce

Allied Telesis Holdings K.K. (TSE:6835) shareholders have had their patience rewarded with a 54% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 42%.

In spite of the firm bounce in price, Allied Telesis Holdings K.K may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.7x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

With earnings growth that's exceedingly strong of late, Allied Telesis Holdings K.K has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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 out of favour.

View our latest analysis for Allied Telesis Holdings K.K

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

How Is Allied Telesis Holdings K.K's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Allied Telesis Holdings K.K's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 232%. The latest three year period has also seen an excellent 167% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

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

With this information, we find it odd that Allied Telesis Holdings K.K is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Allied Telesis Holdings K.K's P/E?

Shares in Allied Telesis Holdings K.K are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Allied Telesis Holdings K.K revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You need to take note of risks, for example - Allied Telesis Holdings K.K has 2 warning signs (and 1 which is significant) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.