Takeuchi Mfg. Co., Ltd.'s (TSE:6432) 25% Dip In Price Shows Sentiment Is Matching Earnings

Takeuchi Mfg. Co., Ltd. (TSE:6432) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 33% in that time.

Although its price has dipped substantially, Takeuchi Mfg's price-to-earnings (or "P/E") ratio of 6.1x 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 13x and even P/E's above 19x are quite common. 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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Takeuchi Mfg 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.

Check out our latest analysis for Takeuchi Mfg

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

What Are Growth Metrics Telling Us About The Low P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. Pleasingly, EPS has also lifted 140% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 3.6% per year over the next three years. With the market predicted to deliver 9.7% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that Takeuchi Mfg's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Takeuchi Mfg's P/E

Takeuchi Mfg's recently weak share price has pulled its P/E below most other companies. 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.

As we suspected, our examination of Takeuchi Mfg's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Takeuchi Mfg (1 makes us a bit uncomfortable!) that you need to take into consideration.

You might be able to find a better investment than Takeuchi Mfg. 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).

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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.