Asahi Intecc Co., Ltd.'s (TSE:7747) P/E Is Still On The Mark Following 28% Share Price Bounce

Asahi Intecc Co., Ltd. (TSE:7747) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

After such a large jump in price, Asahi Intecc's price-to-earnings (or "P/E") ratio of 53.6x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Asahi Intecc could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Asahi Intecc

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

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 7.8% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 34% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 28% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.2% each year, which is noticeably less attractive.

With this information, we can see why Asahi Intecc is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has got Asahi Intecc's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Asahi Intecc's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Asahi Intecc you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.