Benign Growth For FreeBit Co., Ltd. (TSE:3843) Underpins Stock's 27% Plummet

Unfortunately for some shareholders, the FreeBit Co., Ltd. (TSE:3843) share price has dived 27% in the last thirty days, prolonging recent pain. The recent drop has obliterated the annual return, with the share price now down 7.6% over that longer period.

After such a large drop in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider FreeBit as a highly attractive investment with its 5.5x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

FreeBit certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 88% last year. The latest three year period has also seen an excellent 141% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 2.8% per annum as estimated by the one analyst watching the company. With the market predicted to deliver 9.6% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why FreeBit is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

FreeBit's P/E looks about as weak as its stock price lately. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that FreeBit maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with FreeBit.

Of course, you might also be able to find a better stock than FreeBit. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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