The Yokohama Rubber Company, Limited (TSE:5101) Stock Rockets 28% But Many Are Still Ignoring The Company

Despite an already strong run, The Yokohama Rubber Company, Limited (TSE:5101) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days bring the annual gain to a very sharp 83%.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Yokohama Rubber Company's P/E ratio of 14.3x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 15x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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While the market has experienced earnings growth lately, Yokohama Rubber Company's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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How Is Yokohama Rubber Company's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 25%. Even so, admirably EPS has lifted 43% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 18% each year over the next three years. That's shaping up to be materially higher than the 9.6% per annum growth forecast for the broader market.

With this information, we find it interesting that Yokohama Rubber Company is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Yokohama Rubber Company's P/E

Its shares have lifted substantially and now Yokohama Rubber Company's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Yokohama Rubber Company currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 4 warning signs for Yokohama Rubber Company (1 is a bit unpleasant!) that you need to take into consideration.

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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.