Improved Earnings Required Before Ultrafabrics Holdings Co.,Ltd. (TSE:4235) Shares Find Their Feet

Ultrafabrics Holdings Co.,Ltd.'s (TSE:4235) price-to-earnings (or "P/E") ratio of 6.9x might 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 22x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent earnings growth for Ultrafabrics HoldingsLtd has been in line with the market. One possibility is that the P/E is low because investors think this modest earnings performance may begin to slide. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

Check out our latest analysis for Ultrafabrics HoldingsLtd

Keen to find out how analysts think Ultrafabrics HoldingsLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Ultrafabrics HoldingsLtd's Growth Trending?

In order to justify its P/E ratio, Ultrafabrics HoldingsLtd would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.9% last year. Pleasingly, EPS has also lifted 630% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 0.7% per year over the next three years. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader market.

With this information, we can see why Ultrafabrics HoldingsLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Ultrafabrics HoldingsLtd's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Ultrafabrics HoldingsLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 4 warning signs for Ultrafabrics HoldingsLtd that we have uncovered.

You might be able to find a better investment than Ultrafabrics HoldingsLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.