There's No Escaping MINATO HOLDINGS INC.'s (TSE:6862) Muted Earnings

MINATO HOLDINGS INC.'s (TSE:6862) price-to-earnings (or "P/E") ratio of 5.5x might make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 24x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

MINATO HOLDINGS certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 MINATO HOLDINGS

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

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

In order to justify its P/E ratio, MINATO HOLDINGS would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 114% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 382% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 30% as estimated by the only analyst watching the company. With the market predicted to deliver 11% growth , that's a disappointing outcome.

In light of this, it's understandable that MINATO HOLDINGS' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of MINATO HOLDINGS' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - MINATO HOLDINGS has 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.