Meidensha Corporation (TSE:6508) Might Not Be As Mispriced As It Looks After Plunging 30%

The Meidensha Corporation (TSE:6508) share price has fared very poorly over the last month, falling by a substantial 30%. Longer-term, the stock has been solid despite a difficult 30 days, gaining 14% in the last year.

In spite of the heavy fall in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may still consider Meidensha as an attractive investment with its 9.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

Recent times have been advantageous for Meidensha as its earnings have been rising faster 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.

View our latest analysis for Meidensha

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Meidensha .

Is There Any Growth For Meidensha?

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

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 63% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 9.1% each year as estimated by the five analysts watching the company. That's shaping up to be similar to the 9.7% per annum growth forecast for the broader market.

With this information, we find it odd that Meidensha is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Final Word

Meidensha's recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Meidensha currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Meidensha (of which 1 can't be ignored!) you should know about.

If you're unsure about the strength of Meidensha's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.