Pulstec Industrial Co., Ltd.'s (TSE:6894) Share Price Is Matching Sentiment Around Its Earnings

Pulstec Industrial Co., Ltd.'s (TSE:6894) price-to-earnings (or "P/E") ratio of 6.8x might 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 12x and even P/E's above 18x 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.

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Earnings have risen firmly for Pulstec Industrial recently, which is pleasing to see. One possibility is that the P/E is low because investors think this respectable 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.

View our latest analysis for Pulstec Industrial

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Pulstec Industrial will help you shine a light on its historical performance.

How Is Pulstec Industrial's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 19% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 10% 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 Pulstec Industrial is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Pulstec Industrial revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Pulstec Industrial that you should be aware of.

You might be able to find a better investment than Pulstec Industrial. 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.