There's Reason For Concern Over Suzumo Machinery Company Limited's (TSE:6405) Massive 26% Price Jump

Despite an already strong run, Suzumo Machinery Company Limited (TSE:6405) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 113% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Suzumo Machinery may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.9x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Suzumo Machinery certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Suzumo Machinery

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Suzumo Machinery would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 121%. The latest three year period has also seen an excellent 57% 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 7.7% each year as estimated by the two analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.7% per year, which is not materially different.

In light of this, it's curious that Suzumo Machinery's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Suzumo Machinery's P/E

Suzumo Machinery's P/E is getting right up there since its shares have risen strongly. 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.

Our examination of Suzumo Machinery's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Suzumo Machinery, and understanding should be part of your investment process.

Of course, you might also be able to find a better stock than Suzumo Machinery. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.