The Market Doesn't Like What It Sees From Fast Fitness Japan Incorporated's (TSE:7092) Earnings Yet

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Fast Fitness Japan Incorporated (TSE:7092) as an attractive investment with its 9.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Fast Fitness Japan 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Fast Fitness Japan

Keen to find out how analysts think Fast Fitness Japan's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Fast Fitness Japan's Growth Trending?

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

Retrospectively, the last year delivered a decent 10% gain to the company's bottom line. The latest three year period has also seen an excellent 91% overall rise in EPS, aided somewhat by its short-term performance. 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 year should bring diminished returns, with earnings decreasing 9.8% as estimated by the only analyst watching the company. Meanwhile, the broader market is forecast to expand by 11%, which paints a poor picture.

With this information, we are not surprised that Fast Fitness Japan 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

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 Fast Fitness Japan'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.

Having said that, be aware Fast Fitness Japan is showing 2 warning signs in our investment analysis, you should know about.

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

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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.