There's No Escaping Chugoku Marine Paints, Ltd.'s (TSE:4617) Muted Earnings

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may consider Chugoku Marine Paints, Ltd. (TSE:4617) as an attractive investment with its 7.9x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Chugoku Marine Paints certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

See our latest analysis for Chugoku Marine Paints

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chugoku Marine Paints.

How Is Chugoku Marine Paints' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Chugoku Marine Paints' 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 37%. The latest three year period has also seen an excellent 4,217% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 1.0% over the next year. Meanwhile, the broader market is forecast to expand by 9.8%, which paints a poor picture.

With this information, we are not surprised that Chugoku Marine Paints is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Chugoku Marine Paints' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Chugoku Marine Paints' analyst forecasts revealed that its outlook for shrinking earnings 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.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Chugoku Marine Paints with six simple checks.

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.

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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.