Little Excitement Around Kitoku Shinryo Co., Ltd.'s (TSE:2700) Earnings As Shares Take 30% Pounding

The Kitoku Shinryo Co., Ltd. (TSE:2700) share price has softened a substantial 30% over the previous 30 days, handing back much of the gains the stock has made lately. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 272% in the last twelve months.

Even after such a large drop in price, Kitoku Shinryo's price-to-earnings (or "P/E") ratio of 7.4x might still 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 15x and even P/E's above 23x 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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Kitoku Shinryo certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For Kitoku Shinryo?

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

Retrospectively, the last year delivered an exceptional 243% gain to the company's bottom line. Pleasingly, EPS has also lifted 434% 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.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 8.7% per annum as estimated by the only analyst watching the company. That's not great when the rest of the market is expected to grow by 9.5% each year.

With this information, we are not surprised that Kitoku Shinryo is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Kitoku Shinryo's recently weak share price has pulled its P/E below most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 5 warning signs we've spotted with Kitoku Shinryo (including 4 which are concerning).

If these risks are making you reconsider your opinion on Kitoku Shinryo, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.