Tohoku Electric Power Company, Incorporated's (TSE:9506) Shares Lagging The Market But So Is The Business

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may consider Tohoku Electric Power Company, Incorporated (TSE:9506) as a highly attractive investment with its 3.4x P/E ratio. 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.

While the market has experienced earnings growth lately, Tohoku Electric Power Company's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If you still 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 Tohoku Electric Power Company

Keen to find out how analysts think Tohoku Electric Power Company's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Tohoku Electric Power Company's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Tohoku Electric Power Company's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 47% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 3.6% per annum over the next three years. That's not great when the rest of the market is expected to grow by 9.2% per year.

In light of this, it's understandable that Tohoku Electric Power Company'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. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

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.

As we suspected, our examination of Tohoku Electric Power Company's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Tohoku Electric Power Company (2 can't be ignored!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Tohoku Electric Power Company. 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.