There's Reason For Concern Over Daihatsu Infinearth Mfg.Co.,Ltd's (TSE:6023) Massive 29% Price Jump

Despite an already strong run, Daihatsu Infinearth Mfg.Co.,Ltd (TSE:6023) shares have been powering on, with a gain of 29% in the last thirty days. The last 30 days bring the annual gain to a very sharp 94%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Daihatsu Infinearth Mfg.Co.Ltd's P/E ratio of 12.6x, 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.

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While the market has experienced earnings growth lately, Daihatsu Infinearth Mfg.Co.Ltd's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

See our latest analysis for Daihatsu Infinearth Mfg.Co.Ltd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Daihatsu Infinearth Mfg.Co.Ltd.

Is There Some Growth For Daihatsu Infinearth Mfg.Co.Ltd?

Daihatsu Infinearth Mfg.Co.Ltd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered a frustrating 2.3% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 210% in total over the last three years. 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.

Looking ahead now, EPS is anticipated to climb by 5.4% each year during the coming three years according to the lone analyst following the company. Meanwhile, the rest of the market is forecast to expand by 9.9% per year, which is noticeably more attractive.

In light of this, it's curious that Daihatsu Infinearth Mfg.Co.Ltd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Daihatsu Infinearth Mfg.Co.Ltd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Daihatsu Infinearth Mfg.Co.Ltd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Daihatsu Infinearth Mfg.Co.Ltd 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.