Earnings Working Against Mitsui O.S.K. Lines, Ltd.'s (TSE:9104) Share Price

Mitsui O.S.K. Lines, Ltd.'s (TSE:9104) price-to-earnings (or "P/E") ratio of 4x might make it look like a strong 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 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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With earnings growth that's superior to most other companies of late, Mitsui O.S.K. Lines 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 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.

See our latest analysis for Mitsui O.S.K. Lines

Keen to find out how analysts think Mitsui O.S.K. Lines' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Mitsui O.S.K. Lines' Growth Trending?

In order to justify its P/E ratio, Mitsui O.S.K. Lines would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 64% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 37% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 20% each year as estimated by the eleven analysts watching the company. Meanwhile, the broader market is forecast to expand by 8.9% per annum, which paints a poor picture.

In light of this, it's understandable that Mitsui O.S.K. Lines' 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 Bottom Line On Mitsui O.S.K. Lines' P/E

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 Mitsui O.S.K. Lines' 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Mitsui O.S.K. Lines (1 makes us a bit uncomfortable!) that you need to be mindful of.

You might be able to find a better investment than Mitsui O.S.K. Lines. 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.