A Piece Of The Puzzle Missing From Mitsubishi Pencil Co., Ltd.'s (TSE:7976) 26% Share Price Climb

The Mitsubishi Pencil Co., Ltd. (TSE:7976) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 63%.

In spite of the firm bounce in price, it's still not a stretch to say that Mitsubishi Pencil's price-to-earnings (or "P/E") ratio of 13.4x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Mitsubishi Pencil certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Mitsubishi Pencil

Although there are no analyst estimates available for Mitsubishi Pencil, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. The latest three year period has also seen an excellent 177% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 11% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it interesting that Mitsubishi Pencil is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Its shares have lifted substantially and now Mitsubishi Pencil's P/E is also back up to the market median. 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 Mitsubishi Pencil currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings 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 if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

You always need to take note of risks, for example - Mitsubishi Pencil has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Mitsubishi Pencil. 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.