Lead Real Estate Co., Ltd (NASDAQ:LRE) shareholders have had their patience rewarded with a 31% share price jump in the last month. But the last month did very little to improve the 68% share price decline over the last year.
Although its price has surged higher, Lead Real Estate may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.1x, since almost half of all companies in the United States have P/E ratios greater than 19x and even P/E's higher than 35x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
For example, consider that Lead Real Estate's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.
Does Growth Match The Low P/E?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Lead Real Estate's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.2%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 105% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
This is in contrast to the rest of the market, which is expected to grow by 15% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that Lead Real Estate's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
Shares in Lead Real Estate are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.
Our examination of Lead Real Estate revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
Before you take the next step, you should know about the 3 warning signs for Lead Real Estate (1 is a bit unpleasant!) that we have uncovered.
If these risks are making you reconsider your opinion on Lead Real Estate, 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.
