Sanwayuka Industry Corporation (TSE:4125) Soars 27% But It's A Story Of Risk Vs Reward

Sanwayuka Industry Corporation (TSE:4125) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 37% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Sanwayuka Industry's P/E ratio of 11.1x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Sanwayuka Industry could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Sanwayuka Industry

Keen to find out how analysts think Sanwayuka Industry's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For Sanwayuka Industry?

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

Retrospectively, the last year delivered a frustrating 43% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 60% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 16% during the coming year according to the two analysts following the company. With the market only predicted to deliver 9.4%, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Sanwayuka Industry is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Its shares have lifted substantially and now Sanwayuka Industry's P/E is also back up to the market median. 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 Sanwayuka Industry currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Sanwayuka Industry you should know about.

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.