Lacklustre Performance Is Driving Kimura Chemical Plants Co., Ltd.'s (TSE:6378) Low P/E

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 12x, you may consider Kimura Chemical Plants Co., Ltd. (TSE:6378) as an attractive investment with its 7.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Kimura Chemical Plants has been doing very well. 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Kimura Chemical Plants

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 Kimura Chemical Plants' earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Kimura Chemical Plants would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 55% gain to the company's bottom line. As a result, it also grew EPS by 16% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 9.9% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Kimura Chemical Plants is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

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 Kimura Chemical Plants maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Kimura Chemical Plants you should know about.

If these risks are making you reconsider your opinion on Kimura Chemical Plants, 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.

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