Daito Trust Construction Co.,Ltd.'s (TSE:1878) Share Price Not Quite Adding Up

There wouldn't be many who think Daito Trust Construction Co.,Ltd.'s (TSE:1878) price-to-earnings (or "P/E") ratio of 11.1x is worth a mention when the median P/E in Japan is similar at about 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Recent times have been advantageous for Daito Trust ConstructionLtd as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Daito Trust ConstructionLtd

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

How Is Daito Trust ConstructionLtd's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Daito Trust ConstructionLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. Pleasingly, EPS has also lifted 36% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 3.4% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.7% per annum, which is noticeably more attractive.

With this information, we find it interesting that Daito Trust ConstructionLtd is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

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.

We've established that Daito Trust ConstructionLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Daito Trust ConstructionLtd with six simple checks on some of these key factors.

You might be able to find a better investment than Daito Trust ConstructionLtd. 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.