Little Excitement Around Idemitsu Kosan Co.,Ltd.'s (TSE:5019) Earnings

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Idemitsu Kosan Co.,Ltd. (TSE:5019) as a highly attractive investment with its 6x 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 so limited.

Idemitsu KosanLtd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Idemitsu KosanLtd

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

How Is Idemitsu KosanLtd's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.5%. Still, the latest three year period has seen an excellent 614% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.2% per year as estimated by the eight analysts watching the company. With the market predicted to deliver 9.6% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Idemitsu KosanLtd 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Idemitsu KosanLtd'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. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Idemitsu KosanLtd you should be aware of, and 1 of them can't be ignored.

Of course, you might also be able to find a better stock than Idemitsu KosanLtd. 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.

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