Iwabuchi Corporation's (TSE:5983) Subdued P/E Might Signal An Opportunity

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider Iwabuchi Corporation (TSE:5983) as an attractive investment with its 9.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For instance, Iwabuchi's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.

Check out our latest analysis for Iwabuchi

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Iwabuchi will help you shine a light on its historical performance.

How Is Iwabuchi's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Even so, admirably EPS has lifted 32% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 9.8% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it odd that Iwabuchi is trading at a P/E lower than the market. It may be that most investors are not convinced the company can maintain recent growth rates.

The Final Word

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 Iwabuchi revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Iwabuchi that you need to be mindful of.

If these risks are making you reconsider your opinion on Iwabuchi, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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