Komehyo Holdings Co.,Ltd. (TSE:2780) Might Not Be As Mispriced As It Looks After Plunging 28%

Komehyo Holdings Co.,Ltd. (TSE:2780) shares have had a horrible month, losing 28% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 17% share price drop.

Even after such a large drop in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may still consider Komehyo HoldingsLtd as a highly attractive investment with its 6.5x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent earnings growth for Komehyo HoldingsLtd has been in line with the market. It might be that many expect the mediocre earnings performance to degrade, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could pick up some stock while it's out of favour.

View our latest analysis for Komehyo HoldingsLtd

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Does Growth Match The Low P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.5% last year. The latest three year period has also seen an excellent 197% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 40% during the coming year according to the only analyst following the company. With the market only predicted to deliver 11%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Komehyo HoldingsLtd's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Komehyo HoldingsLtd's P/E

Having almost fallen off a cliff, Komehyo HoldingsLtd's share price has pulled its P/E way down as well. 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.

We've established that Komehyo HoldingsLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Before you take the next step, you should know about the 3 warning signs for Komehyo HoldingsLtd (1 is a bit concerning!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.