MITSUI E&S Co., Ltd.'s (TSE:7003) Price Is Right But Growth Is Lacking After Shares Rocket 29%

MITSUI E&S Co., Ltd. (TSE:7003) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The last month tops off a massive increase of 198% in the last year.

Although its price has surged higher, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider MITSUI E&S as a highly attractive investment with its 2.8x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for MITSUI E&S

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, MITSUI E&S would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 157% gain to the company's bottom line. Pleasingly, EPS has also lifted 514% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 36% per annum over the next three years. With the market predicted to deliver 10% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that MITSUI E&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.

What We Can Learn From MITSUI E&S' P/E?

MITSUI E&S' recent share price jump still sees its P/E sitting firmly flat on the ground. 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. 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.

You need to take note of risks, for example - MITSUI E&S has 5 warning signs (and 4 which are significant) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.