Sumitomo Metal Mining Co., Ltd.'s (TSE:5713) 29% Jump Shows Its Popularity With Investors

Sumitomo Metal Mining Co., Ltd. (TSE:5713) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 40% in the last twelve months.

After such a large jump in price, Sumitomo Metal Mining's price-to-earnings (or "P/E") ratio of 28.7x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

We've discovered 3 warning signs about Sumitomo Metal Mining. View them for free.

While the market has experienced earnings growth lately, Sumitomo Metal Mining's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Sumitomo Metal Mining

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

Sumitomo Metal Mining'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.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 55%. This means it has also seen a slide in earnings over the longer-term as EPS is down 86% 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.

Turning to the outlook, the next three years should generate growth of 52% per year as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.8% per annum, which is noticeably less attractive.

In light of this, it's understandable that Sumitomo Metal Mining'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 Bottom Line On Sumitomo Metal Mining's P/E

Sumitomo Metal Mining'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 Sumitomo Metal Mining 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. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Sumitomo Metal Mining (1 doesn't sit too well with us) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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