Potential Upside For ES-CON JAPAN Ltd. (TSE:8892) Not Without Risk

With a median price-to-earnings (or "P/E") ratio of close to 12x in Japan, you could be forgiven for feeling indifferent about ES-CON JAPAN Ltd.'s (TSE:8892) P/E ratio of 10.3x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

As an illustration, earnings have deteriorated at ES-CON JAPAN over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for ES-CON JAPAN

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

How Is ES-CON JAPAN's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like ES-CON JAPAN's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 208% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is only predicted to deliver 9.9% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it interesting that ES-CON JAPAN is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From ES-CON JAPAN's P/E?

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 ES-CON JAPAN currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 4 warning signs we've spotted with ES-CON JAPAN (including 3 which are concerning).

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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