Improved Earnings Required Before Japan Petroleum Exploration Co., Ltd. (TSE:1662) Shares Find Their Feet

Japan Petroleum Exploration Co., Ltd.'s (TSE:1662) price-to-earnings (or "P/E") ratio of 3.2x might make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x 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 so limited.

Japan Petroleum Exploration 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 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.

See our latest analysis for Japan Petroleum Exploration

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Japan Petroleum Exploration.

Is There Any Growth For Japan Petroleum Exploration?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Japan Petroleum Exploration's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 57% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 29% per annum as estimated by the four analysts watching the company. That's not great when the rest of the market is expected to grow by 9.2% per year.

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

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.

As we suspected, our examination of Japan Petroleum Exploration's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Japan Petroleum Exploration (1 is potentially serious) you should be aware of.

If you're unsure about the strength of Japan Petroleum Exploration's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.