Earnings Working Against Mitsubishi Shokuhin Co., Ltd.'s (TSE:7451) Share Price

Mitsubishi Shokuhin Co., Ltd.'s (TSE:7451) price-to-earnings (or "P/E") ratio of 10.9x might 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 24x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Mitsubishi Shokuhin as its earnings have been rising faster 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.

View our latest analysis for Mitsubishi Shokuhin

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

Does Growth Match The Low P/E?

Mitsubishi Shokuhin's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. The strong recent performance means it was also able to grow EPS by 115% 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 7.9% during the coming year according to the lone analyst following the company. That's not great when the rest of the market is expected to grow by 11%.

With this information, we are not surprised that Mitsubishi Shokuhin 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 Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Mitsubishi Shokuhin maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Mitsubishi Shokuhin with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Mitsubishi Shokuhin. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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

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.