Earnings Working Against MITSUI E&S Co., Ltd.'s (TSE:7003) Share Price Following 42% Dive

MITSUI E&S Co., Ltd. (TSE:7003) shareholders that were waiting for something to happen have been dealt a blow with a 42% share price drop in the last month. Still, a bad month hasn't completely ruined the past year with the stock gaining 70%, which is great even in a bull market.

Although its price has dipped substantially, MITSUI E&S' price-to-earnings (or "P/E") ratio of 3.5x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

MITSUI E&S certainly has been doing a good job lately as it's been growing earnings more 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.

View our latest analysis for MITSUI E&S

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How Is MITSUI E&S' Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like MITSUI E&S' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. Pleasingly, EPS has also lifted 14,464% 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.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 19% per year as estimated by the only analyst watching the company. Meanwhile, the broader market is forecast to expand by 9.6% per annum, which paints a poor picture.

With this information, we are not surprised that MITSUI E&S 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 MITSUI E&S' P/E

Having almost fallen off a cliff, MITSUI E&S' share price has pulled its P/E way down as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that MITSUI E&S maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 5 warning signs for MITSUI E&S (4 are a bit unpleasant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on MITSUI E&S, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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