There's No Escaping MODEC, Inc.'s (TSE:6269) Muted Earnings Despite A 36% Share Price Rise

The MODEC, Inc. (TSE:6269) share price has done very well over the last month, posting an excellent gain of 36%. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

In spite of the firm bounce in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may still consider MODEC as an attractive investment with its 8.4x 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 limited.

We've discovered 3 warning signs about MODEC. View them for free.

MODEC certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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 MODEC

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What Are Growth Metrics Telling Us About The Low P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 133% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to slump, contracting by 1.9% per year during the coming three years according to the three analysts following the company. Meanwhile, the broader market is forecast to expand by 9.8% per year, which paints a poor picture.

In light of this, it's understandable that MODEC'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 Bottom Line On MODEC's P/E

Despite MODEC's shares building up a head of steam, its P/E still lags most other companies. 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 MODEC'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.

It is also worth noting that we have found 3 warning signs for MODEC (2 are potentially serious!) that you need to take into consideration.

If you're unsure about the strength of MODEC'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.