Terasaki Electric Co.,Ltd. (TSE:6637) Looks Inexpensive After Falling 40% But Perhaps Not Attractive Enough

Terasaki Electric Co.,Ltd. (TSE:6637) shareholders won't be pleased to see that the share price has had a very rough month, dropping 40% and undoing the prior period's positive performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 9.5% over the last twelve months.

In spite of the heavy fall in price, Terasaki ElectricLtd's price-to-earnings (or "P/E") ratio of 5.2x might still make it look like a strong 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 quite low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Terasaki ElectricLtd 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.

Check out our latest analysis for Terasaki ElectricLtd

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

Terasaki ElectricLtd's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 71% gain to the company's bottom line. Pleasingly, EPS has also lifted 83% 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.

Looking ahead now, EPS is anticipated to slump, contracting by 9.2% per annum during the coming three years according to the only analyst following the company. With the market predicted to deliver 9.6% growth per year, that's a disappointing outcome.

In light of this, it's understandable that Terasaki ElectricLtd'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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Terasaki ElectricLtd's P/E?

Terasaki ElectricLtd's P/E looks about as weak as its stock price lately. 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 Terasaki ElectricLtd 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. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Terasaki ElectricLtd you should know about.

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