Sumitomo Electric Industries, Ltd.'s (TSE:5802) Shares Bounce 26% But Its Business Still Trails The Market

Sumitomo Electric Industries, Ltd. (TSE:5802) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 27%.

Although its price has surged higher, Sumitomo Electric Industries may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.1x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 22x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Sumitomo Electric Industries certainly has been doing a good job lately as it's been growing earnings more 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 Electric Industries

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Sumitomo Electric Industries would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 90%. The strong recent performance means it was also able to grow EPS by 48% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 2.6% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.4% per year, which is noticeably more attractive.

In light of this, it's understandable that Sumitomo Electric Industries' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Sumitomo Electric Industries' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Sumitomo Electric Industries maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Sumitomo Electric Industries that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.