Positive Sentiment Still Eludes Allied Telesis Holdings K.K. (TSE:6835) Following 28% Share Price Slump

The Allied Telesis Holdings K.K. (TSE:6835) share price has softened a substantial 28% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 50% in the last year.

Even after such a large drop 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 13x and even P/E's higher than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Allied Telesis Holdings K.K certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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 that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Allied Telesis Holdings K.K

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 Allied Telesis Holdings K.K's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Allied Telesis Holdings K.K would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 232% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 168% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 10% over the next year, materially lower than the company's recent medium-term annualised growth rates.

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?

Allied Telesis Holdings K.K's P/E looks about as weak as its stock price lately. 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. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Allied Telesis Holdings K.K (1 is concerning!) that you need to be mindful of.

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.