Investors Still Aren't Entirely Convinced By Onamba Co., Ltd.'s (TSE:5816) Earnings Despite 26% Price Jump

Onamba Co., Ltd. (TSE:5816) shares have continued their recent momentum with a 26% gain in the last month alone. Looking further back, the 17% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Onamba as an attractive investment with its 11.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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As an illustration, earnings have deteriorated at Onamba over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

See our latest analysis for Onamba

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

Is There Any Growth For Onamba?

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

Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 49% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is only predicted to deliver 11% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Onamba is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Onamba's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Onamba 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. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Onamba you should know about.

If you're unsure about the strength of Onamba's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.