The Market Lifts Daihatsu Diesel Mfg. Co., Ltd. (TSE:6023) Shares 32% But It Can Do More

Despite an already strong run, Daihatsu Diesel Mfg. Co., Ltd. (TSE:6023) shares have been powering on, with a gain of 32% in the last thirty days. The annual gain comes to 206% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, Daihatsu Diesel Mfg's price-to-earnings (or "P/E") ratio of 11x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 24x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Daihatsu Diesel Mfg has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Daihatsu Diesel Mfg

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 Daihatsu Diesel Mfg's earnings, revenue and cash flow.

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

In order to justify its P/E ratio, Daihatsu Diesel Mfg would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 173%. The latest three year period has also seen an excellent 211% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Daihatsu Diesel Mfg's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift Daihatsu Diesel Mfg's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Daihatsu Diesel Mfg currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Daihatsu Diesel Mfg, and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Daihatsu Diesel Mfg. 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.