Daihatsu Diesel Mfg. Co., Ltd. (TSE:6023) Stock Catapults 28% Though Its Price And Business Still Lag The Market

Daihatsu Diesel Mfg. Co., Ltd. (TSE:6023) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 95%.

Even after such a large jump in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Daihatsu Diesel Mfg as an attractive investment with its 11x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Daihatsu Diesel Mfg certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

View our latest analysis for Daihatsu Diesel Mfg

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. The latest three year period has also seen an excellent 208% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings growth is heading into negative territory, declining 28% over the next year. With the market predicted to deliver 12% growth , that's a disappointing outcome.

In light of this, it's understandable that Daihatsu Diesel Mfg's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Daihatsu Diesel Mfg's P/E

Daihatsu Diesel Mfg's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Daihatsu Diesel Mfg maintains its low P/E on the weakness of its forecast for sliding earnings, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Daihatsu Diesel Mfg (of which 1 doesn't sit too well with us!) you should know about.

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.