Furukawa Electric Co., Ltd. (TSE:5801) Stocks Shoot Up 31% But Its P/E Still Looks Reasonable

Furukawa Electric Co., Ltd. (TSE:5801) shares have continued their recent momentum with a 31% gain in the last month alone. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Furukawa Electric's price-to-earnings (or "P/E") ratio of 25.9x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Furukawa Electric certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Furukawa Electric

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

Is There Enough Growth For Furukawa Electric?

Furukawa Electric's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. Pleasingly, EPS has also lifted 101% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 30% per year as estimated by the eight analysts watching the company. With the market only predicted to deliver 9.8% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Furukawa Electric's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Shares in Furukawa Electric have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Furukawa Electric maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with Furukawa Electric (including 2 which are concerning).

Of course, you might also be able to find a better stock than Furukawa Electric. 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.