There's No Escaping MITSUI E&S Co., Ltd.'s (TSE:7003) Muted Earnings Despite A 39% Share Price Rise

MITSUI E&S Co., Ltd. (TSE:7003) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.

Although its price has surged higher, MITSUI E&S may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.6x, since almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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Recent times have been advantageous for MITSUI E&S as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on MITSUI E&S.

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

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.

If we review the last year of earnings growth, the company posted a terrific increase of 51%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 29% each year as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 9.3% per annum.

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

Shares in MITSUI E&S are going to need a lot more upward momentum to get the company's P/E out of its slump. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for MITSUI E&S (2 are significant!) that you should be aware of before investing here.

If you're unsure about the strength of MITSUI E&S' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.