Takaoka Toko Co., Ltd. (TSE:6617) Looks Inexpensive But Perhaps Not Attractive Enough

With a price-to-earnings (or "P/E") ratio of 8.7x Takaoka Toko Co., Ltd. (TSE:6617) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 20x 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.

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With earnings growth that's inferior to most other companies of late, Takaoka Toko has been relatively sluggish. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Takaoka Toko

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Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 3.2%. The solid recent performance means it was also able to grow EPS by 30% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 0.3% as estimated by the lone analyst watching the company. That's not great when the rest of the market is expected to grow by 9.7%.

In light of this, it's understandable that Takaoka Toko's P/E would sit below the majority of other companies. 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

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Takaoka Toko maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Takaoka Toko with six simple checks.

You might be able to find a better investment than Takaoka Toko. 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.