Choei Inc.'s (TSE:2993) Shares Lagging The Market But So Is The Business

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider Choei Inc. (TSE:2993) as a highly attractive investment with its 6.2x 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 so limited.

For instance, Choei's receding earnings in recent times would have to be some food for thought. 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.

See our latest analysis for Choei

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Choei will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Choei's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.9%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 10% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.8% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Choei is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Choei's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Choei 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Choei (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com