Earnings Working Against DAIWA TSUSHIN Co., Ltd's (TSE:7116) Share Price Following 40% Dive

DAIWA TSUSHIN Co., Ltd (TSE:7116) shareholders won't be pleased to see that the share price has had a very rough month, dropping 40% and undoing the prior period's positive performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 59% loss during that time.

In spite of the heavy fall in price, DAIWA TSUSHIN's price-to-earnings (or "P/E") ratio of 7.9x 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.

The recent earnings growth at DAIWA TSUSHIN would have to be considered satisfactory if not spectacular. It might be that many expect the respectable earnings performance to degrade, 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 DAIWA TSUSHIN

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

Is There Any Growth For DAIWA TSUSHIN?

In order to justify its P/E ratio, DAIWA TSUSHIN would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 6.2% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 82% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.8% shows it's an unpleasant look.

In light of this, it's understandable that DAIWA TSUSHIN's 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From DAIWA TSUSHIN's P/E?

The softening of DAIWA TSUSHIN'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.

As we suspected, our examination of DAIWA TSUSHIN revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 3 warning signs we've spotted with DAIWA TSUSHIN (including 1 which makes us a bit uncomfortable).

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.

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