Fukushima Galilei Co. Ltd. (TSE:6420) Shareholders will not be happy that the share price has had a very bad month, falling 26% and erasing the positive performance of the previous quarter. Long-term shareholders will regret the drop in share price, as it is now virtually flat for the full year after a few promising quarters.
Although the price has dropped significantly, Fukushima Galilei Ltd.’s price-to-earnings (P/E) ratio of 8.1 might still look like a buy when compared to the Japanese market, where about half of the companies have P/E ratios above 13x and even P/E ratios above 20x are quite common. However, the P/E ratio might be low for a reason and further research is needed to determine if it is justified.
The recent past has been favorable for Fukushima Galilei Ltd. as its earnings have grown faster than most other companies. One possibility is that the P/E ratio is low because investors think this strong earnings performance may be less impressive in the future. If you like the company, you hope it doesn’t so you can potentially buy some shares while it’s out of demand.
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Does the growth match the low P/E ratio?
Fukushima Galilei Ltd.’s P/E ratio is typical of a company that is expected to have limited growth and, more importantly, is underperforming the market.
Looking back, the last year has seen the company grow earnings by an exceptional 43%. The strong recent performance means that the company has also grown earnings per share by a total of 96% over the last three years, so it’s fair to say that the company’s recent earnings growth has been outstanding.
Looking ahead, earnings per share are expected to grow 1.5% per year over the next three years, according to analysts covering the company. The rest of the market is forecast to grow 9.6% annually, which is much more attractive.
Given this background, it is understandable that Fukushima Galilei Ltd.’s P/E ratio is lower than that of most other companies. Apparently, many shareholders were not comfortable holding on to their company despite the fact that the company may face a less successful future.
The conclusion on the P/E ratio of Fukushima Galilei Ltd.
The weakening of Fukushima Galilei Ltd. shares means that the P/E ratio is now at a fairly low level. While the price-to-earnings ratio should not be the deciding factor in whether or not you buy a stock, it is a fairly useful indicator of earnings expectations.
We found that Fukushima Galilei Ltd. maintains its low P/E because the growth forecast is, as expected, lower than the broader market. Currently, shareholders accept the low P/E because they acknowledge that future earnings are unlikely to bring pleasant surprises. Under these circumstances, it is difficult to imagine the share price rising much in the near future.
Many other significant risk factors can be found in the company’s balance sheet. Our free By conducting a balance sheet analysis for Fukushima Galilei Ltd. with six simple checks, you can identify any risks that could pose a problem.
If this Risks make you rethink your opinion on Fukushima GalileiLtdexplore our interactive list of high-quality stocks to get a sense of what else is out there.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
