Lacklustre Performance Is Driving Okamura Corporation's (TSE:7994) 28% Price Drop

The Okamura Corporation (TSE:7994) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 25% share price drop.

Although its price has dipped substantially, Okamura may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.5x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Okamura 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Okamura

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Okamura.

Does Growth Match The Low P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 31%. Pleasingly, EPS has also lifted 90% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 4.1% each year during the coming three years according to the three analysts following the company. That's shaping up to be materially lower than the 9.6% each year growth forecast for the broader market.

With this information, we can see why Okamura is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The softening of Okamura's shares means its P/E is now sitting at a pretty low level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Okamura 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Okamura is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Okamura'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.

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