Earnings Not Telling The Story For Sumitomo Electric Industries, Ltd. (TSE:5802) After Shares Rise 28%

Sumitomo Electric Industries, Ltd. (TSE:5802) shareholders have had their patience rewarded with a 28% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 61%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Sumitomo Electric Industries' P/E ratio of 11.6x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Sumitomo Electric Industries certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Sumitomo Electric Industries

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Is There Some Growth For Sumitomo Electric Industries?

The only time you'd be comfortable seeing a P/E like Sumitomo Electric Industries' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. The latest three year period has also seen an excellent 52% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 0.1% per annum as estimated by the eight analysts watching the company. Meanwhile, the broader market is forecast to expand by 10% per annum, which paints a poor picture.

With this information, we find it concerning that Sumitomo Electric Industries is trading at a fairly similar P/E to the market. 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.

What We Can Learn From Sumitomo Electric Industries' P/E?

Sumitomo Electric Industries appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Sumitomo Electric Industries' 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Sumitomo Electric Industries.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.