Odawara Auto-Machine Mfg. Co., Ltd.'s (TYO:7314) Earnings Are Not Doing Enough For Some Investors

By
Simply Wall St
Published
May 09, 2021
JASDAQ:7314
Source: Shutterstock

Odawara Auto-Machine Mfg. Co., Ltd.'s (TYO:7314) price-to-earnings (or "P/E") ratio of 13.6x 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 31x 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.

For instance, Odawara Auto-Machine Mfg's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Odawara Auto-Machine Mfg

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JASDAQ:7314 Price Based on Past Earnings May 10th 2021
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Odawara Auto-Machine Mfg's earnings, revenue and cash flow.

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

In order to justify its P/E ratio, Odawara Auto-Machine Mfg would need to produce sluggish growth that's trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 32%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 15% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Odawara Auto-Machine Mfg is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Bottom Line On Odawara Auto-Machine Mfg's P/E

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.

As we suspected, our examination of Odawara Auto-Machine Mfg revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Odawara Auto-Machine Mfg that you should be aware of.

You might be able to find a better investment than Odawara Auto-Machine Mfg. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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