Investors Appear Satisfied With Osaka Soda Co., Ltd.'s (TSE:4046) Prospects As Shares Rocket 28%

Those holding Osaka Soda Co., Ltd. (TSE:4046) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.8% over the last year.

After such a large jump in price, Osaka Soda may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 21.4x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Osaka Soda 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Osaka Soda

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

Osaka Soda's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 86% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 23% over the next year. Meanwhile, the rest of the market is forecast to only expand by 10%, which is noticeably less attractive.

In light of this, it's understandable that Osaka Soda's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Osaka Soda's P/E is flying high just like its stock has during the last month. 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 Osaka Soda maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Osaka Soda.

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

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