Benign Growth For Hitachi Construction Machinery Co., Ltd. (TSE:6305) Underpins Its Share Price

Hitachi Construction Machinery Co., Ltd.'s (TSE:6305) price-to-earnings (or "P/E") ratio of 8.9x might 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 14x and even P/E's above 23x 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 limited.

Hitachi Construction Machinery certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Hitachi Construction Machinery

Want the full picture on analyst estimates for the company? Then our free report on Hitachi Construction Machinery will help you uncover what's on the horizon.

How Is Hitachi Construction Machinery's Growth Trending?

In order to justify its P/E ratio, Hitachi Construction Machinery would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 50% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 917% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 4.8% per year over the next three years. With the market predicted to deliver 9.3% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why Hitachi Construction Machinery 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 Bottom Line On Hitachi Construction Machinery's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Hitachi Construction Machinery 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Hitachi Construction Machinery (1 can't be ignored!) that you need to be mindful of.

You might be able to find a better investment than Hitachi Construction Machinery. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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

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.