Why Investors Shouldn't Be Surprised By Sankyo Kasei Corporation's (TSE:8138) Low P/E

With a price-to-earnings (or "P/E") ratio of 7.6x Sankyo Kasei Corporation (TSE:8138) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 19x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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The recent earnings growth at Sankyo Kasei would have to be considered satisfactory if not spectacular. It might be that many expect the respectable earnings performance to degrade, which has repressed the P/E. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

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

Sankyo Kasei'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.

Retrospectively, the last year delivered a decent 7.1% gain to the company's bottom line. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

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

In light of this, it's understandable that Sankyo Kasei'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 Bottom Line On Sankyo Kasei's P/E

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.

As we suspected, our examination of Sankyo Kasei revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Sankyo Kasei , and understanding these should be part of your investment process.

If you're unsure about the strength of Sankyo Kasei'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.