Natoco Co., Ltd.'s (TSE:4627) Business Is Trailing The Market But Its Shares Aren't

With a median price-to-earnings (or "P/E") ratio of close to 11x in Japan, you could be forgiven for feeling indifferent about Natoco Co., Ltd.'s (TSE:4627) P/E ratio of 9.4x. 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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Earnings have risen at a steady rate over the last year for Natoco, which is generally not a bad outcome. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to 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 Natoco

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Natoco's earnings, revenue and cash flow.

Is There Some Growth For Natoco?

There's an inherent assumption that a company should be matching the market for P/E ratios like Natoco's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.2% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 27% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's an unpleasant look.

With this information, we find it concerning that Natoco is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Key Takeaway

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.

We've established that Natoco currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Natoco (1 shouldn't be ignored!) that you should be aware of before investing here.

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.