Investors Give Micron Machinery Co., Ltd. (TSE:6159) Shares A 25% Hiding

Micron Machinery Co., Ltd. (TSE:6159) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 19% share price drop.

Although its price has dipped substantially, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Micron Machinery as a highly attractive investment with its 5.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Micron Machinery certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Micron Machinery

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 Micron Machinery's earnings, revenue and cash flow.

Is There Any Growth For Micron Machinery?

The only time you'd be truly comfortable seeing a P/E as depressed as Micron Machinery's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 54% gain to the company's bottom line. Pleasingly, EPS has also lifted 156% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.8% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Micron Machinery's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Shares in Micron Machinery have plummeted and its P/E is now low enough to touch the ground. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Micron Machinery currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Micron Machinery, and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com