Why Investors Shouldn't Be Surprised By MCJ Co., Ltd.'s (TSE:6670) 26% Share Price Plunge

MCJ Co., Ltd. (TSE:6670) shares have had a horrible month, losing 26% after a relatively good period beforehand. Longer-term shareholders would now have taken a real hit with the stock declining 6.7% in the last year.

Although its price has dipped substantially, MCJ's price-to-earnings (or "P/E") ratio of 8.9x might still 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been advantageous for MCJ as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for MCJ

Keen to find out how analysts think MCJ's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For MCJ?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. As a result, it also grew EPS by 22% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 6.4% each year during the coming three years according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to expand by 9.6% per annum, which is noticeably more attractive.

In light of this, it's understandable that MCJ's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

MCJ's recently weak share price has pulled its P/E below most other companies. 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 MCJ maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for MCJ that you should be aware of.

You might be able to find a better investment than MCJ. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com