Sumitomo Seika Chemicals Company, Limited.'s (TSE:4008) Shares Lagging The Market But So Is The Business

With a price-to-earnings (or "P/E") ratio of 9.2x Sumitomo Seika Chemicals Company, Limited. (TSE:4008) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 12x and even P/E's higher than 19x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

As an illustration, earnings have deteriorated at Sumitomo Seika Chemicals Company over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Sumitomo Seika Chemicals Company

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sumitomo Seika Chemicals Company will help you shine a light on its historical performance.

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

Sumitomo Seika Chemicals Company's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 28%. As a result, earnings from three years ago have also fallen 10% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 9.9% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Sumitomo Seika Chemicals Company is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From Sumitomo Seika Chemicals Company's P/E?

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 Sumitomo Seika Chemicals Company revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Sumitomo Seika Chemicals Company.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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

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