Why Investors Shouldn't Be Surprised By The Chugoku Electric Power Co., Inc.'s (TSE:9504) Low P/E

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider The Chugoku Electric Power Co., Inc. (TSE:9504) as a highly attractive investment with its 2.5x 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.

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Chugoku Electric Power could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Check out our latest analysis for Chugoku Electric Power

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

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

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

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 13% per annum over the next three years. That's not great when the rest of the market is expected to grow by 8.7% each year.

With this information, we are not surprised that Chugoku Electric Power 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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Chugoku Electric Power's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Chugoku Electric Power 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Chugoku Electric Power (2 are concerning) you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.