Lacklustre Performance Is Driving Kitoku Shinryo Co., Ltd.'s (TSE:2700) 32% Price Drop

Unfortunately for some shareholders, the Kitoku Shinryo Co., Ltd. (TSE:2700) share price has dived 32% in the last thirty days, prolonging recent pain. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 171% in the last twelve months.

Although its price has dipped substantially, Kitoku Shinryo's price-to-earnings (or "P/E") ratio of 4.2x might still make it look like a strong 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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With earnings growth that's superior to most other companies of late, Kitoku Shinryo has been doing relatively well. 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.

Check out our latest analysis for Kitoku Shinryo

Want the full picture on analyst estimates for the company? Then our free report on Kitoku Shinryo will help you uncover what's on the horizon.

Is There Any Growth For Kitoku Shinryo?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Kitoku Shinryo's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 300% last year. The strong recent performance means it was also able to grow EPS by 533% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 27% during the coming year according to the lone analyst following the company. With the market predicted to deliver 9.1% growth , that's a disappointing outcome.

With this information, we are not surprised that Kitoku Shinryo is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

Kitoku Shinryo's P/E looks about as weak as its stock price lately. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Kitoku Shinryo's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

It is also worth noting that we have found 3 warning signs for Kitoku Shinryo (2 can't be ignored!) that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.