Sumitomo Forestry Co., Ltd.'s (TSE:1911) Subdued P/E Might Signal An Opportunity

Sumitomo Forestry Co., Ltd.'s (TSE:1911) price-to-earnings (or "P/E") ratio of 8.3x 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 14x and even P/E's above 22x 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.

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With earnings growth that's inferior to most other companies of late, Sumitomo Forestry has been relatively sluggish. It seems that many are expecting the uninspiring earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Sumitomo Forestry

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

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

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.1% last year. The latest three year period has also seen a 13% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 12% each year over the next three years. With the market only predicted to deliver 8.9% each year, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Sumitomo Forestry's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

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.

Our examination of Sumitomo Forestry's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Sumitomo Forestry (1 shouldn't be ignored) you should be aware of.

You might be able to find a better investment than Sumitomo Forestry. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.