Kanematsu Corporation's (TSE:8020) Business And Shares Still Trailing The Market

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Kanematsu Corporation (TSE:8020) as an attractive investment with its 9.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Kanematsu's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Kanematsu

Keen to find out how analysts think Kanematsu'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?

Kanematsu's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 9.8%. Pleasingly, EPS has also lifted 37% in aggregate from three years ago, partly 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 generate growth of 7.2% per year as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 9.2% each year growth forecast for the broader market.

In light of this, it's understandable that Kanematsu's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Kanematsu's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Kanematsu maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Kanematsu has 3 warning signs we think you should be aware of.

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