Investors Aren't Buying CAVE Interactive CO.,LTD.'s (TSE:3760) Earnings

CAVE Interactive CO.,LTD.'s (TSE:3760) price-to-earnings (or "P/E") ratio of 3.9x 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 12x and even P/E's above 19x 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.

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As an illustration, earnings have deteriorated at CAVE InteractiveLTD over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, 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 CAVE InteractiveLTD

Although there are no analyst estimates available for CAVE InteractiveLTD, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, CAVE InteractiveLTD would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 10% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that CAVE InteractiveLTD's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From CAVE InteractiveLTD's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of CAVE InteractiveLTD revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for CAVE InteractiveLTD (1 doesn't sit too well with us!) that we have uncovered.

If these risks are making you reconsider your opinion on CAVE InteractiveLTD, 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.