Vario Secure Inc.'s (TSE:4494) Price Is Right But Growth Is Lacking

Vario Secure Inc.'s (TSE:4494) price-to-earnings (or "P/E") ratio of 9.8x might make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Earnings have risen at a steady rate over the last year for Vario Secure, which is generally not a bad outcome. One possibility is that the P/E is low because investors think this good earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

View our latest analysis for Vario Secure

Although there are no analyst estimates available for Vario Secure, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Vario Secure's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 6.0%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 43% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 10% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Vario Secure is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Vario Secure'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.

We've established that Vario Secure maintains its low P/E on the weakness of its sliding earnings over the medium-term, 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. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Vario Secure (1 is potentially serious!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Vario Secure, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.