Aichi Steel Corporation (TSE:5482) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

Explore Aichi Steel's Fair Values from the Community and select yours

Despite an already strong run, Aichi Steel Corporation (TSE:5482) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 227% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Aichi Steel's P/E ratio of 16.1x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Recent times have been quite advantageous for Aichi Steel as its earnings have been rising very briskly. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See 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.

Does Growth Match The P/E?

Aichi Steel's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that Aichi Steel is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Aichi Steel's P/E is also back up to the market median. 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.

Our examination of Aichi Steel revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

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

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.