The Market Lifts Sinfonia Technology Co.,Ltd. (TSE:6507) Shares 27% But It Can Do More

Sinfonia Technology Co.,Ltd. (TSE:6507) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 60%.

In spite of the firm bounce in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Sinfonia TechnologyLtd as an attractive investment with its 11.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

While the market has experienced earnings growth lately, Sinfonia TechnologyLtd's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Sinfonia TechnologyLtd

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

What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Sinfonia TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's bottom line. Even so, admirably EPS has lifted 145% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 18% over the next year. That's shaping up to be materially higher than the 11% growth forecast for the broader market.

With this information, we find it odd that Sinfonia TechnologyLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Sinfonia TechnologyLtd's P/E

Sinfonia TechnologyLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Sinfonia TechnologyLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Sinfonia TechnologyLtd is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Sinfonia TechnologyLtd'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.