Take Care Before Jumping Onto Futaba Industrial Co., Ltd. (TSE:7241) Even Though It's 33% Cheaper

The Futaba Industrial Co., Ltd. (TSE:7241) share price has fared very poorly over the last month, falling by a substantial 33%. Longer-term shareholders would now have taken a real hit with the stock declining 7.0% in the last year.

In spite of the heavy fall in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Futaba Industrial as a highly attractive investment with its 4.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

While the market has experienced earnings growth lately, Futaba Industrial's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Futaba Industrial

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Futaba Industrial.

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

In order to justify its P/E ratio, Futaba Industrial would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 6.9% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the lone analyst watching the company. That's shaping up to be similar to the 9.6% each year growth forecast for the broader market.

In light of this, it's peculiar that Futaba Industrial's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Futaba Industrial's P/E

Having almost fallen off a cliff, Futaba Industrial's share price has pulled its P/E way down as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Futaba Industrial's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Futaba Industrial that you should be aware of.

If you're unsure about the strength of Futaba Industrial's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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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