Positive Sentiment Still Eludes Takatori Corporation (TSE:6338) Following 28% Share Price Slump

To the annoyance of some shareholders, Takatori Corporation (TSE:6338) shares are down a considerable 28% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 75% loss during that time.

Even after such a large drop in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may still consider Takatori as a highly attractive investment with its 4.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

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For example, consider that Takatori's financial performance has been poor lately as its earnings have been in decline. 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.

View our latest analysis for Takatori

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 Takatori's earnings, revenue and cash flow.

How Is Takatori's Growth Trending?

In order to justify its P/E ratio, Takatori would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 42%. Still, the latest three year period has seen an excellent 53% overall rise in EPS, in spite of its unsatisfying short-term performance. 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 10% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Takatori is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Takatori's P/E?

Shares in Takatori have plummeted and its P/E is now low enough to touch the ground. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Takatori 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.

Before you take the next step, you should know about the 3 warning signs for Takatori (1 shouldn't be ignored!) that we have uncovered.

If these risks are making you reconsider your opinion on Takatori, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.