Fujikura Ltd.'s (TSE:5803) Share Price Is Still Matching Investor Opinion Despite 31% Slump

The Fujikura Ltd. (TSE:5803) share price has fared very poorly over the last month, falling by a substantial 31%. Looking at the bigger picture, even after this poor month the stock is up 83% in the last year.

Even after such a large drop in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may still consider Fujikura as a stock to potentially avoid with its 15.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Fujikura has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Fujikura

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

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Fujikura's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 146% last year. The latest three year period has also seen an excellent 344% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 9.5% per annum growth forecast for the broader market.

With this information, we can see why Fujikura is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Despite the recent share price weakness, Fujikura's P/E remains higher than most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Fujikura's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Fujikura is showing 2 warning signs in our investment analysis, and 1 of those shouldn't be ignored.

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.