There's Reason For Concern Over Yodogawa Steel Works, Ltd.'s (TSE:5451) Massive 32% Price Jump

Yodogawa Steel Works, Ltd. (TSE:5451) shareholders have had their patience rewarded with a 32% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 95%.

Since its price has surged higher, Yodogawa Steel Works may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 37.4x, since almost half of all companies in Japan have P/E ratios under 14x 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.

As an illustration, earnings have deteriorated at Yodogawa Steel Works over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Yodogawa Steel Works

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Yodogawa Steel Works will help you shine a light on its historical performance.

How Is Yodogawa Steel Works' Growth Trending?

Yodogawa Steel Works' 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.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 58%. This means it has also seen a slide in earnings over the longer-term as EPS is down 28% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.7% shows it's an unpleasant look.

With this information, we find it concerning that Yodogawa Steel Works is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Yodogawa Steel Works' P/E

Shares in Yodogawa Steel Works have built up some good momentum lately, which has really inflated its P/E. 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 Yodogawa Steel Works currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 4 warning signs for Yodogawa Steel Works that you should be aware of.

Of course, you might also be able to find a better stock than Yodogawa Steel Works. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.