Kyowa Electronic Instruments Co., Ltd. (TSE:6853) Stock's 26% Dive Might Signal An Opportunity But It Requires Some Scrutiny

The Kyowa Electronic Instruments Co., Ltd. (TSE:6853) share price has fared very poorly over the last month, falling by a substantial 26%. Longer-term shareholders would now have taken a real hit with the stock declining 7.6% in the last year.

Although its price has dipped substantially, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 12x, you may still consider Kyowa Electronic Instruments as an attractive investment with its 8.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Kyowa Electronic Instruments has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.

Check out our latest analysis for Kyowa Electronic Instruments

Although there are no analyst estimates available for Kyowa Electronic Instruments, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Kyowa Electronic Instruments?

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

Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. The latest three year period has also seen an excellent 52% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 9.9% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Kyowa Electronic Instruments' P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

The softening of Kyowa Electronic Instruments' shares means its P/E is now sitting at a pretty low level. 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 Kyowa Electronic Instruments revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you take the next step, you should know about the 3 warning signs for Kyowa Electronic Instruments (1 shouldn't be ignored!) that we have uncovered.

You might be able to find a better investment than Kyowa Electronic Instruments. 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