More Unpleasant Surprises Could Be In Store For Prodelight Co.,Ltd.'s (TSE:5580) Shares After Tumbling 30%

The Prodelight Co.,Ltd. (TSE:5580) share price has fared very poorly over the last month, falling by a substantial 30%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 50% share price drop.

Although its price has dipped substantially, ProdelightLtd's price-to-earnings (or "P/E") ratio of 15.5x might still make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For instance, ProdelightLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for ProdelightLtd

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 ProdelightLtd's earnings, revenue and cash flow.

How Is ProdelightLtd's Growth Trending?

In order to justify its P/E ratio, ProdelightLtd would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 9.5%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% 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.

Comparing that to the market, which is predicted to deliver 9.8% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that ProdelightLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On ProdelightLtd's P/E

ProdelightLtd's P/E hasn't come down all the way after its stock plunged. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of ProdelightLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for ProdelightLtd (of which 1 is a bit concerning!) you should know about.

If these risks are making you reconsider your opinion on ProdelightLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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