There's No Escaping Maruichi Steel Tube Ltd.'s (TSE:5463) Muted Earnings

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Maruichi Steel Tube Ltd. (TSE:5463) as an attractive investment with its 10.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Maruichi Steel Tube certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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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 Maruichi Steel Tube's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 137%. The latest three year period has also seen a 14% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 18% per annum as estimated by the three analysts watching the company. With the market predicted to deliver 9.2% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that Maruichi Steel Tube'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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

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

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.

We've established that Maruichi Steel Tube maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Maruichi Steel Tube (1 is significant!) that you should be aware of before investing here.

If you're unsure about the strength of Maruichi Steel Tube's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.