Hitachi Zosen Corporation (TSE:7004) Held Back By Insufficient Growth Even After Shares Climb 36%

The Hitachi Zosen Corporation (TSE:7004) share price has done very well over the last month, posting an excellent gain of 36%. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Even after such a large jump in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Hitachi Zosen as an attractive investment with its 11.1x P/E ratio. 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 Hitachi Zosen 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 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 Hitachi Zosen

Want the full picture on analyst estimates for the company? Then our free report on Hitachi Zosen will help you uncover what's on the horizon.

How Is Hitachi Zosen's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 62% last year. EPS has also lifted 5.6% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings growth is heading into negative territory, declining 0.6% per year over the next three years. With the market predicted to deliver 9.9% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Hitachi Zosen 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Hitachi Zosen's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Hitachi Zosen'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Hitachi Zosen with six simple checks on some of these key factors.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.