Chugai Mining Co., Ltd. (TSE:1491) Might Not Be As Mispriced As It Looks After Plunging 29%

The Chugai Mining Co., Ltd. (TSE:1491) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 94% in the last year.

In spite of the heavy fall in price, there still wouldn't be many who think Chugai Mining's price-to-earnings (or "P/E") ratio of 14x is worth a mention when the median P/E in Japan is similar at about 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Chugai Mining certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. 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 not quite in favour.

Check out our latest analysis for Chugai Mining

Although there are no analyst estimates available for Chugai Mining, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Chugai Mining's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 387% gain to the company's bottom line. The latest three year period has also seen an excellent 176% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 10% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Chugai Mining is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Following Chugai Mining's share price tumble, its P/E is now hanging on to the median market P/E. 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.

Our examination of Chugai Mining revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Having said that, be aware Chugai Mining is showing 1 warning sign in our investment analysis, you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.