Fewer Investors Than Expected Jumping On KITAC Corporation (TSE:4707)

With a price-to-earnings (or "P/E") ratio of 10.4x KITAC Corporation (TSE:4707) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 16x 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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For example, consider that KITAC's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for KITAC

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

In order to justify its P/E ratio, KITAC would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. Even so, admirably EPS has lifted 130% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.8% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that KITAC's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of KITAC revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 4 warning signs for KITAC (1 doesn't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of KITAC's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.