Unpleasant Surprises Could Be In Store For ONDECK Co., Ltd.'s (TSE:7360) Shares

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider ONDECK Co., Ltd. (TSE:7360) as a stock to avoid entirely with its 28.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for ONDECK as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for ONDECK

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 ONDECK's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as steep as ONDECK's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 279% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 72% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 8.9% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that ONDECK'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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

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.

We've established that ONDECK currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - ONDECK has 1 warning sign we think you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.