Odakyu Electric Railway Co., Ltd.'s (TSE:9007) Prospects Need A Boost To Lift Shares

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider Odakyu Electric Railway Co., Ltd. (TSE:9007) as a highly attractive investment with its 5.6x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Odakyu Electric Railway 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 Odakyu Electric Railway

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

How Is Odakyu Electric Railway's Growth Trending?

Odakyu Electric Railway's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 58%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 24% each year during the coming three years according to the three analysts following the company. With the market predicted to deliver 9.3% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Odakyu Electric Railway is trading at a P/E lower than the market. 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.

What We Can Learn From Odakyu Electric Railway's P/E?

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Odakyu Electric Railway maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Odakyu Electric Railway (of which 2 can't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Odakyu Electric Railway. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.