Investors don’t see any light at the end of Daicel Corporation’s (TSE:4202) tunnel.

When almost half of Japan’s companies have a price-to-earnings (or “P/E”) ratio of more than 15x, you might consider Daicel Corporation (TSE:4202) as an attractive investment with a price/earnings ratio of 7.3x. However, the price-to-earnings ratio may be low for a reason and further research is needed to determine if this is justified.

Recent times have been good for Daicel, as its profits have grown faster than most other companies. It may be that many expect the strong earnings figures to deteriorate materially, which has weighed on the price/earnings ratio. If not, existing shareholders have reason to be quite optimistic about the future direction of the share price.

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TSE:4202 Price-to-earnings ratio versus sector May 2, 2024

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How is Daicel’s growth going?

There is an inherent assumption that a company must underperform the market for price-to-earnings ratios like Daicel’s to be considered reasonable.

Retrospectively, the past year delivered an exceptional 54% gain to the company’s bottom line. Pleasingly, earnings per share are also up 431% overall compared to three years ago, thanks to growth over the past twelve months. Therefore, it’s fair to say that earnings growth has been excellent for the company recently.

Looking to the future, estimates from the eight analysts covering the company suggest earnings should grow 4.2% per year over the next three years. That appears to be significantly lower than the 11% annual growth expectation for the broader market.

In light of this, it is understandable that Daicel’s price-to-earnings ratio is lower than most other companies. Apparently, many shareholders were not comfortable holding on while the company may be facing a less prosperous future.

The last word

It’s not wise to use the price-to-earnings ratio alone to determine whether you should sell your shares, but it can provide a practical guide to the company’s future prospects.

As we suspected, our review of Daicel’s analyst forecasts found that its lower earnings outlook is contributing to its low price-to-earnings ratio. At this point, shareholders accept the low price/earnings because they admit that future earnings are unlikely to bring any pleasant surprises. Unless these conditions improve, they will continue to be a barrier to the stock price around these levels.

You always have to think about risks. An example: we’ve seen it 2 warning signs for Daicel you have to take it into account.

If this risks will make you reconsider your opinion about Daicelexplore our interactive list of high-quality stocks to get an idea of ​​what else is out there.

Valuation is complex, but we help make it simple.

Find out if Daicel may be over or undervalued by checking out our comprehensive analysis, including: fair value estimates, risks and cautions, dividends, insider transactions and financial health.

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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 is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.