Investors Still Aren't Entirely Convinced By Japan Investment Adviser Co., Ltd.'s (TSE:7172) Earnings Despite 27% Price Jump

Japan Investment Adviser Co., Ltd. (TSE:7172) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The annual gain comes to 108% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Japan Investment Adviser may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.5x, since almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 22x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Japan Investment Adviser certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.

Check out our latest analysis for Japan Investment Adviser

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Japan Investment Adviser.

How Is Japan Investment Adviser's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Japan Investment Adviser's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 239% gain to the company's bottom line. Still, incredibly EPS has fallen 3.0% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 19% over the next year. That's shaping up to be materially higher than the 9.2% growth forecast for the broader market.

In light of this, it's peculiar that Japan Investment Adviser's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Japan Investment Adviser's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Japan Investment Adviser currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Japan Investment Adviser (at least 1 which is significant), and understanding them should be part of your investment process.

If you're unsure about the strength of Japan Investment Adviser's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.