Osaka Gas Co., Ltd.'s (TSE:9532) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

Osaka Gas Co., Ltd. (TSE:9532) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 57% in the last year.

In spite of the firm bounce in price, Osaka Gas' price-to-earnings (or "P/E") ratio of 11.3x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 23x 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 limited.

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Recent times have been advantageous for Osaka Gas 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 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 Osaka Gas

Want the full picture on analyst estimates for the company? Then our free report on Osaka Gas will help you uncover what's on the horizon.

Is There Any Growth For Osaka Gas?

The only time you'd be truly comfortable seeing a P/E as low as Osaka Gas' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 95% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 208% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 5.0% per annum over the next three years. With the market predicted to deliver 9.3% growth per year, that's a disappointing outcome.

With this information, we are not surprised that Osaka Gas 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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Osaka Gas' P/E?

The latest share price surge wasn't enough to lift Osaka Gas' P/E close to the market median. 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.

We've established that Osaka Gas 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Osaka Gas that you need to be mindful of.

You might be able to find a better investment than Osaka Gas. 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.