It's A Story Of Risk Vs Reward With Otani Kogyo Co.,Ltd. (TSE:5939)

There wouldn't be many who think Otani Kogyo Co.,Ltd.'s (TSE:5939) price-to-earnings (or "P/E") ratio of 12x is worth a mention when the median P/E in Japan is similar at about 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Otani KogyoLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Otani KogyoLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Otani KogyoLtd's earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Otani KogyoLtd's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 37% last year. Pleasingly, EPS has also lifted 301% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's noticeably more attractive on an annualised basis.

In light of this, it's curious that Otani KogyoLtd's P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

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.

Our examination of Otani KogyoLtd revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market 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 the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Otani KogyoLtd, and understanding should be part of your investment process.

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.