Benign Growth For Tokyo Steel Manufacturing Co., Ltd. (TSE:5423) Underpins Its Share Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may consider Tokyo Steel Manufacturing Co., Ltd. (TSE:5423) as an attractive investment with its 7.4x 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.

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While the market has experienced earnings growth lately, Tokyo Steel Manufacturing's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Tokyo Steel Manufacturing

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

Does Growth Match The Low P/E?

Tokyo Steel Manufacturing's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.7%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 12% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 1.8% each year over the next three years. That's not great when the rest of the market is expected to grow by 9.6% per annum.

In light of this, it's understandable that Tokyo Steel Manufacturing's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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 Tokyo Steel Manufacturing's analyst forecasts revealed that its outlook for shrinking earnings 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 1 warning sign for Tokyo Steel Manufacturing that you should be aware of.

You might be able to find a better investment than Tokyo Steel Manufacturing. 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.