Benign Growth For Toyota Motor Corporation (TSE:7203) Underpins Stock's 33% Plummet

Toyota Motor Corporation (TSE:7203) shareholders that were waiting for something to happen have been dealt a blow with a 33% share price drop in the last month. The recent drop has obliterated the annual return, with the share price now down 8.7% over that longer period.

Even after such a large drop in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Toyota Motor as a highly attractive investment with its 6.1x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Toyota Motor has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for Toyota Motor

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How Is Toyota Motor's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 66% gain to the company's bottom line. The latest three year period has also seen an excellent 73% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.9% each year as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 9.6% per annum.

With this information, we are not surprised that Toyota Motor is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Shares in Toyota Motor have plummeted and its P/E is now low enough to touch the ground. 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.

As we suspected, our examination of Toyota Motor's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 3 warning signs for Toyota Motor (2 don't sit too well with us!) that you should be aware of.

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.

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