Investors Aren't Buying Trusco Nakayama Corporation's (TSE:9830) Earnings

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may consider Trusco Nakayama Corporation (TSE:9830) as an attractive investment with its 8.7x 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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Recent times have been advantageous for Trusco Nakayama as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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.

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Is There Any Growth For Trusco Nakayama?

The only time you'd be truly comfortable seeing a P/E as low as Trusco Nakayama's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. Pleasingly, EPS has also lifted 39% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 3.8% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.8% per annum, which is noticeably more attractive.

With this information, we can see why Trusco Nakayama is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Trusco Nakayama maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

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

If you're unsure about the strength of Trusco Nakayama'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.