Aoyama Trading Co., Ltd.'s (TSE:8219) Shares Bounce 44% But Its Business Still Trails The Market

Aoyama Trading Co., Ltd. (TSE:8219) shareholders have had their patience rewarded with a 44% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

In spite of the firm bounce in price, Aoyama Trading may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.3x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Aoyama Trading has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, 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.

View our latest analysis for Aoyama Trading

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

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Aoyama Trading would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 76% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 6.2% per year during the coming three years according to the only analyst following the company. With the market predicted to deliver 10% growth per year, that's a disappointing outcome.

In light of this, it's understandable that Aoyama Trading'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.

The Key Takeaway

The latest share price surge wasn't enough to lift Aoyama Trading's P/E close to the market median. 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 Aoyama Trading 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Aoyama Trading (2 are significant!) that you need to be mindful of.

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

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

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.