Earnings Not Telling The Story For Kyudenko Corporation (TSE:1959)

There wouldn't be many who think Kyudenko Corporation's (TSE:1959) price-to-earnings (or "P/E") ratio of 14.7x is worth a mention when the median P/E in Japan is similar at about 13x. 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.

Recent earnings growth for Kyudenko has been in line with the market. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

View our latest analysis for Kyudenko

Keen to find out how analysts think Kyudenko's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Kyudenko's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Kyudenko's to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. EPS has also lifted 23% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 3.5% per annum as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.3% per annum, which is noticeably more attractive.

In light of this, it's curious that Kyudenko's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Kyudenko currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Kyudenko with six simple checks.

You might be able to find a better investment than Kyudenko. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.