There's No Escaping Kimura Chemical Plants Co., Ltd.'s (TSE:6378) Muted Earnings Despite A 30% Share Price Rise

Kimura Chemical Plants Co., Ltd. (TSE:6378) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Although its price has surged higher, Kimura Chemical Plants' price-to-earnings (or "P/E") ratio of 7.2x might still 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 21x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about Kimura Chemical Plants. View them for free.

Recent times have been quite advantageous for Kimura Chemical Plants as its earnings have been rising very briskly. 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

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Kimura Chemical Plants will help you shine a light on its historical performance.

How Is Kimura Chemical Plants' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 49%. As a result, it also grew EPS by 17% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.6% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Kimura Chemical Plants is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Kimura Chemical Plants' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Kimura Chemical Plants revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Kimura Chemical Plants that you should be aware of.

Of course, you might also be able to find a better stock than Kimura Chemical Plants. 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.