What Zojirushi Corporation's (TSE:7965) 25% Share Price Gain Is Not Telling You

Zojirushi Corporation (TSE:7965) shares have had a really impressive month, gaining 25% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.7% in the last twelve months.

Following the firm bounce in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Zojirushi as a stock to potentially avoid with its 19.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Zojirushi certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Zojirushi

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

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

The only time you'd be truly comfortable seeing a P/E as high as Zojirushi's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. As a result, it also grew EPS by 15% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 2.1% each year over the next three years. Meanwhile, the broader market is forecast to expand by 9.3% each year, which paints a poor picture.

In light of this, it's alarming that Zojirushi's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Bottom Line On Zojirushi's P/E

Zojirushi's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Zojirushi's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

You might be able to find a better investment than Zojirushi. 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.