There's No Escaping Konishi Co., Ltd.'s (TSE:4956) Muted Earnings Despite A 28% Share Price Rise

Konishi Co., Ltd. (TSE:4956) shares have had a really impressive month, gaining 28% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.3% in the last twelve months.

Even after such a large jump in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Konishi as an attractive investment with its 11.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Konishi could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still 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.

Check out our latest analysis for Konishi

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

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

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

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 40% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 4.5% each year as estimated by the lone analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 9.4% each year, which is noticeably more attractive.

With this information, we can see why Konishi 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 Final Word

Despite Konishi's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Konishi'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Konishi that you should be aware of.

You might be able to find a better investment than Konishi. 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.