The Market Doesn't Like What It Sees From Sanyo Trading Co., Ltd.'s (TSE:3176) Earnings Yet As Shares Tumble 26%

Sanyo Trading Co., Ltd. (TSE:3176) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 12% share price drop.

Even after such a large drop in price, Sanyo Trading's price-to-earnings (or "P/E") ratio of 6.2x might still make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Sanyo Trading as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for Sanyo Trading

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

How Is Sanyo Trading's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 33% last year. The strong recent performance means it was also able to grow EPS by 52% in total over the last three years. 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 generate growth of 3.5% per year as estimated by the sole analyst watching the company. With the market predicted to deliver 9.6% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's understandable that Sanyo Trading's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Sanyo Trading's P/E?

Sanyo Trading's P/E looks about as weak as its stock price lately. 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 Sanyo Trading maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for Sanyo Trading you should be aware of.

Of course, you might also be able to find a better stock than Sanyo Trading. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com