YASKAWA Electric Corporation (TSE:6506) Stock Rockets 34% As Investors Are Less Pessimistic Than Expected

YASKAWA Electric Corporation (TSE:6506) shareholders have had their patience rewarded with a 34% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 13% over that time.

After such a large jump in price, YASKAWA Electric may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.2x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Recent times have been advantageous for YASKAWA Electric as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for YASKAWA Electric

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like YASKAWA Electric's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. Pleasingly, EPS has also lifted 41% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 5.7% each year as estimated by the analysts watching the company. With the market predicted to deliver 9.5% growth per annum, that's a disappointing outcome.

With this information, we find it concerning that YASKAWA Electric is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in YASKAWA Electric's shares has lifted the company's P/E to a fairly high level. 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.

We've established that YASKAWA Electric currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with YASKAWA Electric (at least 2 which are a bit unpleasant), and understanding them should be part of your investment process.

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.