What Minami Acoustics Limited's (SZSE:301383) 26% Share Price Gain Is Not Telling You

Minami Acoustics Limited (SZSE:301383) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 40%.

Although its price has surged higher, there still wouldn't be many who think Minami Acoustics' price-to-earnings (or "P/E") ratio of 39.5x is worth a mention when the median P/E in China is similar at about 38x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been pleasing for Minami Acoustics as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Minami Acoustics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Minami Acoustics.

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

In order to justify its P/E ratio, Minami Acoustics would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a decent 4.2% gain to the company's bottom line. EPS has also lifted 11% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings growth is heading into negative territory, declining 10% over the next year. Meanwhile, the broader market is forecast to expand by 38%, which paints a poor picture.

In light of this, it's somewhat alarming that Minami Acoustics' P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

Its shares have lifted substantially and now Minami Acoustics' P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Minami Acoustics' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 3 warning signs for Minami Acoustics (2 are a bit concerning!) that we have uncovered.

If these risks are making you reconsider your opinion on Minami Acoustics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.