Ricksoft Co., Ltd. (TSE:4429) Looks Inexpensive After Falling 27% But Perhaps Not Attractive Enough

Simply Wall St · 10/18 23:10

To the annoyance of some shareholders, Ricksoft Co., Ltd. (TSE:4429) shares are down a considerable 27% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 34% in that time.

Even after such a large drop in price, Ricksoft's price-to-earnings (or "P/E") ratio of 9.9x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Ricksoft has been doing very well. 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.

View our latest analysis for Ricksoft

pe-multiple-vs-industry
TSE:4429 Price to Earnings Ratio vs Industry October 18th 2024
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 Ricksoft's earnings, revenue and cash flow.

Is There Any Growth For Ricksoft?

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

If we review the last year of earnings growth, the company posted a terrific increase of 192%. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's an unpleasant look.

In light of this, it's understandable that Ricksoft's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Ricksoft's recently weak share price has pulled its P/E below most other companies. 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 Ricksoft maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Ricksoft that you need to take into consideration.

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