There's No Escaping Daihatsu Infinearth Mfg.Co.,Ltd's (TSE:6023) Muted Earnings Despite A 28% Share Price Rise

The Daihatsu Infinearth Mfg.Co.,Ltd (TSE:6023) share price has done very well over the last month, posting an excellent gain of 28%. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

Even after such a large jump in price, Daihatsu Infinearth Mfg.Co.Ltd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.4x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Daihatsu Infinearth Mfg.Co.Ltd's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

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How Is Daihatsu Infinearth Mfg.Co.Ltd's Growth Trending?

Daihatsu Infinearth Mfg.Co.Ltd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. The latest three year period has also seen an excellent 263% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 3.5% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 8.6% each year, which is noticeably more attractive.

With this information, we can see why Daihatsu Infinearth Mfg.Co.Ltd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Despite Daihatsu Infinearth Mfg.Co.Ltd's shares building up a head of steam, its P/E still lags most other companies. 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 Infinearth Mfg.Co.Ltd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Daihatsu Infinearth Mfg.Co.Ltd (1 is potentially serious) you should be aware of.

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