CEL Corporation's (TSE:5078) Share Price Could Signal Some Risk

There wouldn't be many who think CEL Corporation's (TSE:5078) price-to-earnings (or "P/E") ratio of 12.6x is worth a mention when the median P/E in Japan is similar at about 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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The recent earnings growth at CEL would have to be considered satisfactory if not spectacular. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

See our latest analysis for CEL

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 CEL's earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like CEL's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 6.5%. However, this wasn't enough as the latest three year period has seen an unpleasant 88% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.8% shows it's an unpleasant look.

With this information, we find it concerning that CEL is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From CEL's P/E?

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.

We've established that CEL currently trades on a 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 moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for CEL (of which 2 are potentially serious!) you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.