Investors Still Aren't Entirely Convinced By Mitsubishi Kakoki Kaisha, Ltd.'s (TSE:6331) Earnings Despite 39% Price Jump

Mitsubishi Kakoki Kaisha, Ltd. (TSE:6331) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Even after such a large jump in price, Mitsubishi Kakoki Kaisha may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.3x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x 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.

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As an illustration, earnings have deteriorated at Mitsubishi Kakoki Kaisha over the last year, which is not ideal at all. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Mitsubishi Kakoki Kaisha

Although there are no analyst estimates available for Mitsubishi Kakoki Kaisha, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Mitsubishi Kakoki Kaisha's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. Even so, admirably EPS has lifted 49% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 9.2% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Mitsubishi Kakoki Kaisha'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 Final Word

The latest share price surge wasn't enough to lift Mitsubishi Kakoki Kaisha's P/E close to the market median. 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 Mitsubishi Kakoki Kaisha revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. 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. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Mitsubishi Kakoki Kaisha that you should be aware of.

Of course, you might also be able to find a better stock than Mitsubishi Kakoki Kaisha. 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.