Cautious Investors Not Rewarding Odawara Engineering Co., Ltd.'s (TSE:6149) Performance Completely

With a price-to-earnings (or "P/E") ratio of 10.5x Odawara Engineering Co., Ltd. (TSE:6149) may be sending bullish signals at the moment, given that 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For instance, Odawara Engineering's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Odawara Engineering

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 Odawara Engineering's earnings, revenue and cash flow.

How Is Odawara Engineering's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Odawara Engineering's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 33% in total over the last three years. 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.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Odawara Engineering's P/E sits below the majority of other companies. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Odawara Engineering 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. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

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

Of course, you might also be able to find a better stock than Odawara Engineering. 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.