IMAGE MAGIC Inc.'s (TSE:7793) Shares Leap 25% Yet They're Still Not Telling The Full Story

Explore IMAGE MAGIC's Fair Values from the Community and select yours

Despite an already strong run, IMAGE MAGIC Inc. (TSE:7793) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 52% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about IMAGE MAGIC's P/E ratio of 14.3x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. 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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Earnings have risen firmly for IMAGE MAGIC recently, which is pleasing to see. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Check out our latest analysis for IMAGE MAGIC

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

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

The only time you'd be comfortable seeing a P/E like IMAGE MAGIC's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 9.2%. Pleasingly, EPS has also lifted 57% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that IMAGE MAGIC is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Key Takeaway

IMAGE MAGIC appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that IMAGE MAGIC currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for IMAGE MAGIC (1 shouldn't be ignored!) that you should be aware of.

You might be able to find a better investment than IMAGE MAGIC. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.