GS Yuasa Corporation (TSE:6674) Surges 37% Yet Its Low P/E Is No Reason For Excitement

GS Yuasa Corporation (TSE:6674) shareholders have had their patience rewarded with a 37% share price jump in the last month. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, GS Yuasa's price-to-earnings (or "P/E") ratio of 12x 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 15x and even P/E's above 24x 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.

Recent times have been advantageous for GS Yuasa as its earnings have been rising faster than most other companies. 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 GS Yuasa

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

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 81% gain to the company's bottom line. The latest three year period has also seen an excellent 89% overall rise in EPS, aided by its short-term performance. 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 bring diminished returns, with earnings decreasing 6.4% each year as estimated by the six analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.9% each year, which paints a poor picture.

With this information, we are not surprised that GS Yuasa is trading at a P/E lower than the market. 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 GS Yuasa's P/E

The latest share price surge wasn't enough to lift GS Yuasa's P/E close to the market median. 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 GS Yuasa'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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for GS Yuasa (1 is significant) you should be aware of.

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