Investors Aren't Buying Ferrotec Holdings Corporation's (TSE:6890) Earnings

Ferrotec Holdings Corporation's (TSE:6890) price-to-earnings (or "P/E") ratio of 6.9x 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 15x and even P/E's above 24x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Ferrotec Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Ferrotec Holdings

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

There's an inherent assumption that a company should far underperform the market for P/E ratios like Ferrotec Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's bottom line. Even so, admirably EPS has lifted 143% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 13% as estimated by the six analysts watching the company. With the market predicted to deliver 11% growth , that's a disappointing outcome.

With this information, we are not surprised that Ferrotec Holdings is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Ferrotec Holdings maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Ferrotec Holdings.

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.