Earnings Tell The Story For Adeka Corporation (TSE:4401)
There wouldn't be many who think Adeka Corporation's (TSE:4401) price-to-earnings (or "P/E") ratio of 15x is worth a mention when the median P/E in Japan is similar at about 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times haven't been advantageous for Adeka as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. 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 Adeka
How Is Adeka's Growth Trending?
The only time you'd be comfortable seeing a P/E like Adeka's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a decent 9.1% gain to the company's bottom line. The latest three year period has also seen a 16% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.
Looking ahead now, EPS is anticipated to climb by 11% per annum during the coming three years according to the seven analysts following the company. That's shaping up to be similar to the 9.0% per year growth forecast for the broader market.
In light of this, it's understandable that Adeka's P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Adeka maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Adeka with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Adeka. 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.