Foster Electric Company, Limited's (TSE:6794) 26% Share Price Surge Not Quite Adding Up

Foster Electric Company, Limited (TSE:6794) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 96%.

In spite of the firm bounce in price, it's still not a stretch to say that Foster Electric Company's price-to-earnings (or "P/E") ratio of 12.6x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Foster Electric Company as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Foster Electric Company

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

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 246% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 6.8% each year as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 9.5% each year growth forecast for the broader market.

In light of this, it's curious that Foster Electric Company's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Foster Electric Company appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Foster Electric Company currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

If you're unsure about the strength of Foster Electric Company'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.