Improved Earnings Required Before Morinaga Milk Industry Co., Ltd. (TSE:2264) Shares Find Their Feet

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Morinaga Milk Industry Co., Ltd. (TSE:2264) as a highly attractive investment with its 4x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Morinaga Milk Industry 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 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 Morinaga Milk Industry

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Morinaga Milk Industry.

Is There Any Growth For Morinaga Milk Industry?

Morinaga Milk Industry's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 184% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 273% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 32% each year during the coming three years according to the five analysts following the company. That's not great when the rest of the market is expected to grow by 10% each year.

In light of this, it's understandable that Morinaga Milk Industry'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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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.

We've established that Morinaga Milk Industry maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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 Morinaga Milk Industry you should be aware of, and 1 of them is concerning.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.