Earnings Working Against Japan Petroleum Exploration Co., Ltd.'s (TSE:1662) Share Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may consider Japan Petroleum Exploration Co., Ltd. (TSE:1662) as a highly attractive investment with its 5.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Japan Petroleum Exploration hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is Japan Petroleum Exploration's Growth Trending?

In order to justify its P/E ratio, Japan Petroleum Exploration would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 20% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 13% per year during the coming three years according to the four analysts following the company. With the market predicted to deliver 9.7% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Japan Petroleum Exploration's P/E would sit below the majority of other companies. 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

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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

And what about other risks? Every company has them, and we've spotted 2 warning signs for Japan Petroleum Exploration (of which 1 can't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Japan Petroleum Exploration. 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.