Keisei Electric Railway Co., Ltd.'s (TSE:9009) Prospects Need A Boost To Lift Shares

With a price-to-earnings (or "P/E") ratio of 6.6x Keisei Electric Railway Co., Ltd. (TSE:9009) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 21x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Keisei Electric Railway has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Keisei Electric Railway

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

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

Retrospectively, the last year delivered an exceptional 188% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 21% each year as estimated by the five analysts watching the company. With the market predicted to deliver 9.2% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Keisei Electric Railway'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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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.

As we suspected, our examination of Keisei Electric Railway's 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Keisei Electric Railway (of which 2 are potentially serious!) you should know about.

If these risks are making you reconsider your opinion on Keisei 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.