Krosaki Harima Corporation (TSE:5352) Surges 26% Yet Its Low P/E Is No Reason For Excitement

Krosaki Harima Corporation (TSE:5352) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 137% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Krosaki Harima as an attractive investment with its 10.1x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Krosaki Harima has been doing relatively well. 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.

Check out our latest analysis for Krosaki Harima

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

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 97% last year. The latest three year period has also seen an excellent 167% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 0.2% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.9% per year, which is noticeably more attractive.

With this information, we can see why Krosaki Harima 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.

What We Can Learn From Krosaki Harima's P/E?

Despite Krosaki Harima's shares building up a head of steam, its P/E still lags most other companies. 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 Krosaki Harima'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.

You always need to take note of risks, for example - Krosaki Harima has 2 warning signs we think you should be aware of.

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.