The Market Doesn't Like What It Sees From Kitagawa Seiki Co.,Ltd.'s (TSE:6327) Earnings Yet

With a price-to-earnings (or "P/E") ratio of 12.5x Kitagawa Seiki Co.,Ltd. (TSE:6327) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 23x are not unusual. 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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With earnings growth that's superior to most other companies of late, Kitagawa SeikiLtd has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Kitagawa SeikiLtd

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

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

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

Retrospectively, the last year delivered an exceptional 152% gain to the company's bottom line. Still, incredibly EPS has fallen 5.8% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.5% per annum as estimated by the one analyst watching the company. That's not great when the rest of the market is expected to grow by 9.0% per annum.

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

The Key Takeaway

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 Kitagawa SeikiLtd'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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Kitagawa SeikiLtd that 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.