The price of Asmarq Co., Ltd. (TSE:4197) is correct, but lacks growth

With a price-to-earnings ratio (or “P/E”) of 10.4x Asmarq Co., Ltd. (TSE:4197) may be sending bullish signals right now, as almost half of all companies in Japan have P/E ratios of more than 14x, and even P/E ratios of more than 22x are not uncommon. However, it is not advisable to simply take the P/E ratio at face value, as there may be an explanation as to why it is capped.

Asmarq has been doing a good job of late growing its profits at a solid pace. Many may assume that the respectable earnings performance will deteriorate significantly, which has depressed the P/E ratio. If this is not the case, existing shareholders have reason to be optimistic about the future development of the share price.

Check out our latest analysis for Asmarq

Would you like to get a complete overview of the company’s profits, sales and cash flow? Then ours free A report on Asmarq will help you gain insight into Asmarq’s historical performance.

How is Asmarq growing?

A P/E ratio as low as Asmarq’s would only really be comfortable for you if the company’s growth lags the market.

If we first look back, we see that the company managed to grow earnings per share by a whopping 10% last year. The company’s solid recent performance has also seen it grow its earnings per share by a total of 17% over the last three years. Accordingly, shareholders are likely to have been satisfied with the medium-term profit growth rates.

Comparing this recent medium-term earnings trajectory with the broader market’s one-year growth forecast of 13% shows that the company is significantly less attractive on an annual basis.

With this in mind, it’s understandable that Asmarq’s P/E ratio is lower than most other companies. It seems that most investors assume that the recent limited growth rates will continue in the future and are only willing to pay a lower amount for the stock.

The conclusion on Asmarq’s P/E ratio

Deciding whether to sell your stock based solely on price-to-earnings ratios doesn’t make sense, but it can be a practical guide to the company’s future prospects.

We noted that Asmarq is maintaining its low P/E ratio due to weakness in its recent three-year growth and is below the broader market forecast, as expected. At this point, investors believe that the potential for earnings improvement is not great enough to justify a higher P/E ratio. Under these circumstances, if recent medium-term earnings trends continue, it is unlikely that the share price will rise sharply in the near future.

You should always think about risks. Case in point: We discovered it 1 warning sign for Asmarq You should be aware of that.

If you are interested in P/E ratiosmaybe you would like to see this free Collection of other companies with strong earnings growth and low P/E ratios.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute 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 focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.