Investors Don't See Light At End Of Kobe Steel, Ltd.'s (TSE:5406) Tunnel

Kobe Steel, Ltd.'s (TSE:5406) price-to-earnings (or "P/E") ratio of 6x might make it look like a strong 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 21x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Kobe Steel certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Kobe Steel

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Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. Pleasingly, EPS has also lifted 80% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 0.09% each year during the coming three years according to the five analysts following the company. That's shaping up to be materially lower than the 9.9% each year growth forecast for the broader market.

With this information, we can see why Kobe Steel is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Kobe Steel's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Kobe Steel'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.

Plus, you should also learn about these 3 warning signs we've spotted with Kobe Steel (including 1 which is significant).

If these risks are making you reconsider your opinion on Kobe Steel, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.