Hosoya Pyro-Engineering Co., Ltd.'s (TSE:4274) 27% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

Hosoya Pyro-Engineering Co., Ltd. (TSE:4274) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 34% in that time.

In spite of the heavy fall in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may still consider Hosoya Pyro-Engineering as a stock to avoid entirely with its 28.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Hosoya Pyro-Engineering has been doing a decent job lately as it's been growing earnings at a reasonable pace. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Hosoya Pyro-Engineering

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

Is There Enough Growth For Hosoya Pyro-Engineering?

In order to justify its P/E ratio, Hosoya Pyro-Engineering would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 4.5% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 3.7% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 9.8% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Hosoya Pyro-Engineering is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Hosoya Pyro-Engineering's P/E?

Hosoya Pyro-Engineering's shares may have retreated, but its P/E is still flying high. 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 Hosoya Pyro-Engineering revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hosoya Pyro-Engineering, and understanding these should be part of your investment process.

You might be able to find a better investment than Hosoya Pyro-Engineering. 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.

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