IBJ, Inc. (TSE:6071) Stock Rockets 40% As Investors Are Less Pessimistic Than Expected

IBJ, Inc. (TSE:6071) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 4.8% isn't as impressive.

Even after such a large jump in price, there still wouldn't be many who think IBJ's price-to-earnings (or "P/E") ratio of 14.7x is worth a mention when the median P/E in Japan is similar at about 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.

Recent earnings growth for IBJ has been in line with the market. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

Check out our latest analysis for IBJ

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How Is IBJ's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 13%. Pleasingly, EPS has also lifted 113% 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.

Turning to the outlook, the next three years should generate growth of 3.9% each year as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.4% per annum, which is noticeably more attractive.

In light of this, it's curious that IBJ'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. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now IBJ'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.

Our examination of IBJ's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for IBJ with six simple checks on some of these key factors.

If you're unsure about the strength of IBJ'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.