The Market Doesn't Like What It Sees From Daihatsu Diesel Mfg. Co., Ltd.'s (TSE:6023) Earnings Yet As Shares Tumble 31%

The Daihatsu Diesel Mfg. Co., Ltd. (TSE:6023) share price has fared very poorly over the last month, falling by a substantial 31%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 12% in that time.

Even after such a large drop in price, Daihatsu Diesel Mfg's price-to-earnings (or "P/E") ratio of 6x 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 13x and even P/E's above 19x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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With earnings growth that's superior to most other companies of late, Daihatsu Diesel Mfg has been doing relatively well. 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.

See our latest analysis for Daihatsu Diesel Mfg

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

Is There Any Growth For Daihatsu Diesel Mfg?

Daihatsu Diesel Mfg's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. The strong recent performance means it was also able to grow EPS by 208% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 26% during the coming year according to the only analyst following the company. With the market predicted to deliver 10% growth , that's a disappointing outcome.

With this information, we are not surprised that Daihatsu Diesel Mfg is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Daihatsu Diesel Mfg's P/E?

Shares in Daihatsu Diesel Mfg have plummeted and its P/E is now low enough to touch the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Daihatsu Diesel Mfg's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Daihatsu Diesel Mfg that we have uncovered.

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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.