Slammed 33% Yamax Corp. (TSE:5285) Screens Well Here But There Might Be A Catch

To the annoyance of some shareholders, Yamax Corp. (TSE:5285) shares are down a considerable 33% in the last month, which continues a horrid run for the company. The last month has meant the stock is now only up 7.5% during the last year.

In spite of the heavy fall in price, Yamax's price-to-earnings (or "P/E") ratio of 6.3x might still make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Yamax certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Yamax

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Yamax's earnings, revenue and cash flow.

How Is Yamax's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 140% last year. The latest three year period has also seen an excellent 197% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 9.8% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Yamax's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

Shares in Yamax have plummeted and its P/E is now low enough to touch the ground. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Yamax currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Yamax (1 doesn't sit too well with us) 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.

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