Mitani Corporation's (TSE:8066) Subdued P/E Might Signal An Opportunity

Mitani Corporation's (TSE:8066) price-to-earnings (or "P/E") ratio of 7.9x might make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 12x and even P/E's above 18x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Earnings have risen firmly for Mitani recently, which is pleasing to see. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Mitani

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

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. The latest three year period has also seen an excellent 70% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Mitani is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Mitani currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Mitani , and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Mitani, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.