Ebara (TSE:6361): Evaluating Valuation Following Board-Approved Share Buyback Program

Ebara (TSE:6361) recently announced a share buyback, with its Board of Directors approving the repurchase of 1,286,900 shares as part of a broader plan to acquire up to 9 million shares. This move is aimed at optimizing capital structure and could influence investor sentiment in the near term.

See our latest analysis for Ebara.

Momentum has been building fast for Ebara, with a 1-day share price return of 3.7% and a standout year-to-date gain of nearly 73%. When including dividends, total shareholder return over the past year comes in at a striking 79%. This caps off an impressive multiyear run that reflects growing market confidence and the positive response to recent buyback activity.

If you're looking for your next opportunity, now is a great time to broaden your search and discover fast growing stocks with high insider ownership

But after such an extraordinary run, the critical question is whether Ebara shares still offer compelling value or if future growth is already fully reflected in the stock price. This could leave little room for further upside.

Price-to-Earnings of 28.1x: Is it justified?

Ebara’s shares last closed at ¥4,491, which puts its price-to-earnings (P/E) ratio at a substantial 28.1x. This is notably above both the peer average and the wider machinery industry. The market is therefore pricing in optimistic expectations for future earnings growth.

The price-to-earnings ratio gauges how much investors are willing to pay per yen of earnings. For capital goods companies like Ebara, this metric is especially relevant since it reflects sentiment about the company’s future profit power based on its current earnings performance and outlook.

While a high P/E ratio can sometimes be justified by strong future growth prospects or high-quality earnings, investors should take note: Ebara’s ratio stands well above industry benchmarks, including a peer average of 23.2x and the Japanese machinery sector’s typical 13.1x. Notably, the fair value P/E, based on broader valuation models, is estimated at 25x. The current market could gravitate towards this level if sentiment shifts or growth moderates.

Explore the SWS fair ratio for Ebara

Result: Price-to-Earnings of 28.1x (OVERVALUED)

However, slowing annual revenue growth and a share price now trading well above analyst targets both present risks that could curb further gains for Ebara.

Find out about the key risks to this Ebara narrative.

Another View: Discounted Cash Flow Tells a Different Story

Instead of focusing on earnings multiples, our SWS DCF model estimates Ebara's fair value at ¥3,991. This suggests the current share price may be overvalued relative to the company’s future cash flows. Could this mean the market is too optimistic, or is there growth that the DCF does not capture?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Ebara for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 868 undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Ebara Narrative

If our perspective doesn't align with your own or you'd rather investigate the numbers firsthand, you can quickly assemble your personal view and insights in just a few minutes using Do it your way.

A great starting point for your Ebara research is our analysis highlighting 2 key rewards and 1 important warning sign that could impact your investment decision.

Looking for more investment ideas?

Opportunities do not wait. Get ahead of the market by finding tomorrow’s strongest performers with Simply Wall Street’s powerful, tailored screeners. Don't let your next great investment slip away.

• Uncover unique opportunities among established companies offering reliable payouts by checking out these 16 dividend stocks with yields > 3%. These companies feature robust yields and steady financials.
• Boost your portfolio’s future potential by targeting high-growth sectors through these 25 AI penny stocks, where artificial intelligence innovation drives value and rapid expansion.
• Capture value by targeting these 868 undervalued stocks based on cash flows, which presents stocks trading below their intrinsic worth for investors focused on long-term gains.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com