Investors Still Aren't Entirely Convinced By Japan Foundation Engineering Co., Ltd.'s (TSE:1914) Earnings Despite 26% Price Jump

Japan Foundation Engineering Co., Ltd. (TSE:1914) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 55% in the last year.

Even after such a large jump in price, Japan Foundation Engineering's price-to-earnings (or "P/E") ratio of 9.9x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been quite advantageous for Japan Foundation Engineering as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Japan Foundation Engineering

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Japan Foundation Engineering will help you shine a light on its historical performance.

How Is Japan Foundation Engineering's Growth Trending?

In order to justify its P/E ratio, Japan Foundation Engineering would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 113% gain to the company's bottom line. The latest three year period has also seen an excellent 1,133% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is only predicted to deliver 10% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Japan Foundation Engineering's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Japan Foundation Engineering's P/E?

The latest share price surge wasn't enough to lift Japan Foundation Engineering's P/E close to the market median. 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.

Our examination of Japan Foundation Engineering revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Japan Foundation Engineering that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.