The Market Doesn't Like What It Sees From Meidensha Corporation's (TSE:6508) Earnings Yet As Shares Tumble 27%

Meidensha Corporation (TSE:6508) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Longer-term, the stock has been solid despite a difficult 30 days, gaining 20% in the last year.

Even after such a large drop in price, Meidensha may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.3x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Meidensha has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Meidensha

Keen to find out how analysts think Meidensha's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Meidensha's Growth Trending?

Meidensha's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 90% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 78% 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.

Shifting to the future, estimates from the six analysts covering the company suggest earnings growth is heading into negative territory, declining 0.3% each year over the next three years. With the market predicted to deliver 9.6% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Meidensha is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

The softening of Meidensha's shares means its P/E is now sitting at a pretty low level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Meidensha's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Meidensha has 3 warning signs (and 1 which is significant) we think you should know about.

Of course, you might also be able to find a better stock than Meidensha. 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.

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