Why Investors Shouldn't Be Surprised By Daiichi Jitsugyo Co., Ltd.'s (TSE:8059) Low P/E

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Daiichi Jitsugyo Co., Ltd. (TSE:8059) as an attractive investment with its 11.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For example, consider that Daiichi Jitsugyo's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 Daiichi Jitsugyo

Although there are no analyst estimates available for Daiichi Jitsugyo, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Daiichi Jitsugyo?

In order to justify its P/E ratio, Daiichi Jitsugyo would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 4.2% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 28% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

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

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Daiichi Jitsugyo maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, 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 2 warning signs for Daiichi Jitsugyo that you need to be mindful of.

If you're unsure about the strength of Daiichi Jitsugyo'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.