Take Care Before Jumping Onto A&D HOLON Holdings Company, Limited (TSE:7745) Even Though It's 26% Cheaper

A&D HOLON Holdings Company, Limited (TSE:7745) shares have had a horrible month, losing 26% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 34%, which is great even in a bull market.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about A&D HOLON Holdings Company's P/E ratio of 12.6x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

A&D HOLON Holdings Company could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for A&D HOLON Holdings Company

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

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

There's an inherent assumption that a company should be matching the market for P/E ratios like A&D HOLON Holdings Company's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.2%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 19% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the four analysts following the company. That's shaping up to be materially higher than the 9.6% per year growth forecast for the broader market.

In light of this, it's curious that A&D HOLON Holdings Company'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 Bottom Line On A&D HOLON Holdings Company's P/E

With its share price falling into a hole, the P/E for A&D HOLON Holdings Company looks quite average now. 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 A&D HOLON Holdings Company's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

You always need to take note of risks, for example - A&D HOLON Holdings Company has 1 warning sign we think you should be aware of.

You might be able to find a better investment than A&D HOLON Holdings Company. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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