Market Might Still Lack Some Conviction On Suzumo Machinery Company Limited (TSE:6405) Even After 26% Share Price Boost

Suzumo Machinery Company Limited (TSE:6405) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 33% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Suzumo Machinery's price-to-earnings (or "P/E") ratio of 15.8x is worth a mention when the median P/E in Japan is similar at about 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's exceedingly strong of late, Suzumo Machinery has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Suzumo Machinery

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

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Suzumo Machinery's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 38%. The strong recent performance means it was also able to grow EPS by 67% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.6% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Suzumo Machinery's P/E sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Final Word

Suzumo Machinery appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Suzumo Machinery revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Suzumo Machinery with six simple checks on some of these key factors.

If you're unsure about the strength of Suzumo Machinery'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.