Di-Nikko Engineering Co., Ltd. (TYO:6635) Stock's 25% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Di-Nikko Engineering Co., Ltd. (TYO:6635) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Following the heavy fall in price, Di-Nikko Engineering's price-to-earnings (or "P/E") ratio of 10.9x 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 18x and even P/E's above 32x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For instance, Di-Nikko Engineering's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Di-Nikko Engineering

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Di-Nikko Engineering will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 17%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 40% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is predicted to deliver 13% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Di-Nikko Engineering's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can maintain recent growth rates.

What We Can Learn From Di-Nikko Engineering's P/E?

Di-Nikko Engineering's recently weak share price has pulled its P/E below most other companies. 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.

Our examination of Di-Nikko Engineering revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look similar to current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

You need to take note of risks, for example - Di-Nikko Engineering has 5 warning signs (and 1 which is concerning) we think you should know about.

Of course, you might also be able to find a better stock than Di-Nikko Engineering. So you may wish to see this free collection of other companies that sit on P/E's below 20x and have grown earnings strongly.

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This article by Simply Wall St is general in nature. 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.
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