AB&Company Co.,Ltd.'s (TSE:9251) 28% Price Boost Is Out Of Tune With Earnings

The AB&Company Co.,Ltd. (TSE:9251) share price has done very well over the last month, posting an excellent gain of 28%. The last 30 days bring the annual gain to a very sharp 31%.

After such a large jump in price, AB&CompanyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.5x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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While the market has experienced earnings growth lately, AB&CompanyLtd's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for AB&CompanyLtd

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

In order to justify its P/E ratio, AB&CompanyLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 2.8% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 23% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 9.2% during the coming year according to the one analyst following the company. With the market predicted to deliver 11% growth , the company is positioned for a comparable earnings result.

With this information, we find it interesting that AB&CompanyLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From AB&CompanyLtd's P/E?

AB&CompanyLtd's P/E is getting right up there since its shares have risen strongly. 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 AB&CompanyLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 1 warning sign for AB&CompanyLtd that you should be aware of.

If these risks are making you reconsider your opinion on AB&CompanyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.