Di-Nikko Engineering Co., Ltd.'s (TSE:6635) Price Is Right But Growth Is Lacking After Shares Rocket 27%

The Di-Nikko Engineering Co., Ltd. (TSE:6635) share price has done very well over the last month, posting an excellent gain of 27%. Looking further back, the 15% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, Di-Nikko Engineering may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 11.3x, since almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 24x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Di-Nikko Engineering's financial performance has been poor lately as its earnings have been in decline. 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.

See our latest analysis for Di-Nikko Engineering

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 Di-Nikko Engineering's earnings, revenue and cash flow.

How Is Di-Nikko Engineering's Growth Trending?

Di-Nikko Engineering's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered a frustrating 71% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 10% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Di-Nikko Engineering 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 Final Word

Despite Di-Nikko Engineering's shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Di-Nikko Engineering 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's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Di-Nikko Engineering (at least 2 which are a bit concerning), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Di-Nikko Engineering, 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.