Aichi Steel Corporation (TSE:5482) Looks Just Right With A 29% Price Jump

Despite an already strong run, Aichi Steel Corporation (TSE:5482) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 155% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Aichi Steel may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 21.7x, since almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 2 warning signs investors should be aware of before investing in Aichi Steel. Read for free now.

Earnings have risen firmly for Aichi Steel recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Aichi Steel

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 Aichi Steel's earnings, revenue and cash flow.

Is There Enough Growth For Aichi Steel?

Aichi Steel'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 19% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 641% in total over the last three years. 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 9.7% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

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

The Key Takeaway

Shares in Aichi Steel 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.

As we suspected, our examination of Aichi Steel revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Aichi Steel is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us.

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

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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.