The Japan Steel Works, Ltd. (TSE:5631) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

The Japan Steel Works, Ltd. (TSE:5631) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Japan Steel Works' P/E ratio of 12.7x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. 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.

Recent times have been advantageous for Japan Steel Works as its earnings have been rising faster 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 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 not quite in favour.

Check out our latest analysis for Japan Steel Works

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

Does Growth Match The P/E?

In order to justify its P/E ratio, Japan Steel Works would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 114% last year. The strong recent performance means it was also able to grow EPS by 121% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 8.3% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10% per annum, which is not materially different.

In light of this, it's understandable that Japan Steel Works' P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Final Word

Japan Steel Works appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

As we suspected, our examination of Japan Steel Works' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Japan Steel Works you should be aware of.

Of course, you might also be able to find a better stock than Japan Steel Works. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.