Toyoda Gosei Co., Ltd. (TSE:7282) Looks Inexpensive But Perhaps Not Attractive Enough

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider Toyoda Gosei Co., Ltd. (TSE:7282) as an attractive investment with its 6.8x P/E ratio. However, the P/E might be 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, Toyoda Gosei has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Toyoda Gosei

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

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

Toyoda Gosei's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 52%. The latest three year period has also seen a 16% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 5.0% per year as estimated by the nine analysts watching the company. With the market predicted to deliver 10% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Toyoda Gosei is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Toyoda Gosei's P/E

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.

We've established that Toyoda Gosei maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Toyoda Gosei that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.