Investors Don't See Light At End Of Furuno Electric Co., Ltd.'s (TSE:6814) Tunnel And Push Stock Down 39%

The Furuno Electric Co., Ltd. (TSE:6814) share price has fared very poorly over the last month, falling by a substantial 39%. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 11%.

Even after such a large drop in price, Furuno Electric's price-to-earnings (or "P/E") ratio of 6.8x 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.

With earnings growth that's superior to most other companies of late, Furuno Electric 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 Furuno Electric

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

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

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

Retrospectively, the last year delivered an exceptional 218% gain to the company's bottom line. The latest three year period has also seen a 29% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings growth is heading into negative territory, declining 3.7% each year over the next three years. Meanwhile, the broader market is forecast to expand by 9.6% per year, which paints a poor picture.

With this information, we are not surprised that Furuno Electric 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Furuno Electric's P/E

The softening of Furuno Electric's shares means its P/E is now sitting at a pretty low level. 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 Furuno Electric 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Furuno Electric is showing 3 warning signs in our investment analysis, and 2 of those are a bit concerning.

You might be able to find a better investment than Furuno Electric. 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.

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