M - mart Inc. (TSE:4380) Might Not Be As Mispriced As It Looks After Plunging 41%

The M - mart Inc. (TSE:4380) share price has fared very poorly over the last month, falling by a substantial 41%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 48% share price drop.

Even after such a large drop in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider M - mart as an attractive investment with its 10.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

M - mart has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for M - mart

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on M - mart will help you shine a light on its historical performance.

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

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

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 151% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.8% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that M - mart is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

The softening of M - mart's shares means its P/E is now sitting at a pretty low level. 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 M - mart revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You should always think about risks. Case in point, we've spotted 2 warning signs for M - mart you should be aware of, and 1 of them doesn't sit too well with us.

You might be able to find a better investment than M - mart. 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