There's No Escaping Uchida Yoko Co., Ltd.'s (TSE:8057) Muted Earnings

With a price-to-earnings (or "P/E") ratio of 9.9x Uchida Yoko Co., Ltd. (TSE:8057) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 22x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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With earnings growth that's superior to most other companies of late, Uchida Yoko has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Uchida Yoko

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

How Is Uchida Yoko's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 40%. Pleasingly, EPS has also lifted 118% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.1% per annum as estimated by the one analyst watching the company. With the market predicted to deliver 9.1% growth each year, that's a disappointing outcome.

With this information, we are not surprised that Uchida Yoko 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Uchida Yoko 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for Uchida Yoko (2 are a bit unpleasant!) that you need to take into consideration.

You might be able to find a better investment than Uchida Yoko. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.