Lacklustre Performance Is Driving Iwatani Corporation's (TSE:8088) 29% Price Drop

Iwatani Corporation (TSE:8088) shares have had a horrible month, losing 29% after a relatively good period beforehand. The recent drop has obliterated the annual return, with the share price now down 4.1% over that longer period.

Even after such a large drop in price, Iwatani's price-to-earnings (or "P/E") ratio of 8.6x might still make it look like a 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for Iwatani as its earnings have been rising faster 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Iwatani

Want the full picture on analyst estimates for the company? Then our free report on Iwatani will help you uncover what's on the horizon.

Is There Any Growth For Iwatani?

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

If we review the last year of earnings growth, the company posted a terrific increase of 48%. The latest three year period has also seen an excellent 91% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 7.0% per annum during the coming three years according to the three analysts following the company. That's shaping up to be materially lower than the 9.6% per annum growth forecast for the broader market.

In light of this, it's understandable that Iwatani's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

The softening of Iwatani's shares means its P/E is now sitting at a pretty low level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Iwatani's analyst forecasts revealed that its inferior earnings outlook 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Iwatani that you need to be mindful of.

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

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