Odakyu Electric Railway Co., Ltd.'s (TSE:9007) Low P/E No Reason For Excitement

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may consider Odakyu Electric Railway Co., Ltd. (TSE:9007) as a highly attractive investment with its 6.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's superior to most other companies of late, Odakyu Electric Railway has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Growth For Odakyu Electric Railway?

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

Retrospectively, the last year delivered an exceptional 101% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 25% each year as estimated by the four analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.5% each year, which paints a poor picture.

In light of this, it's understandable that Odakyu Electric Railway's P/E would sit below the majority of other companies. 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 Final Word

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.

We've established that Odakyu Electric Railway maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 4 warning signs we've spotted with Odakyu Electric Railway (including 2 which are a bit unpleasant).

If these risks are making you reconsider your opinion on Odakyu Electric Railway, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.