Sumitomo Riko Company Limited's (TSE:5191) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Sumitomo Riko Company Limited (TSE:5191) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 61%.

In spite of the firm bounce in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Sumitomo Riko as an attractive investment with its 9.2x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for Sumitomo Riko as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

View our latest analysis for Sumitomo Riko

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

Is There Any Growth For Sumitomo Riko?

The only time you'd be truly comfortable seeing a P/E as low as Sumitomo Riko's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.2% per annum as estimated by the sole analyst watching the company. That's not great when the rest of the market is expected to grow by 9.3% per year.

With this information, we are not surprised that Sumitomo Riko is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

Despite Sumitomo Riko's shares building up a head of steam, its P/E still lags most other companies. 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 Sumitomo Riko maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 2 warning signs for Sumitomo Riko (1 doesn't sit too well with us!) 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.