Why Investors Shouldn't Be Surprised By The Kansai Electric Power Company, Incorporated's (TSE:9503) Low P/E

The Kansai Electric Power Company, Incorporated's (TSE:9503) price-to-earnings (or "P/E") ratio of 6.1x 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 21x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been advantageous for Kansai Electric Power Company as its earnings have been rising faster than most other companies. 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 Kansai Electric Power Company

Want the full picture on analyst estimates for the company? Then our free report on Kansai Electric Power Company will help you uncover what's on the horizon.

How Is Kansai Electric Power Company's Growth Trending?

Kansai Electric Power Company'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 64%. Pleasingly, EPS has also lifted 313% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 6.8% per annum during the coming three years according to the five analysts following the company. That's not great when the rest of the market is expected to grow by 9.3% per year.

With this information, we are not surprised that Kansai Electric Power Company is trading at a P/E lower than the market. 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 Kansai Electric Power Company's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Kansai Electric Power Company 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.

You need to take note of risks, for example - Kansai Electric Power Company has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If you're unsure about the strength of Kansai Electric Power Company's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.