Earnings Not Telling The Story For Eyez,Inc. (TSE:5242) After Shares Rise 48%

Eyez,Inc. (TSE:5242) shares have had a really impressive month, gaining 48% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 45%.

Since its price has surged higher, EyezInc's price-to-earnings (or "P/E") ratio of 73.6x 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.

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For example, consider that EyezInc's financial performance has been pretty ordinary lately as earnings growth is non-existent. One possibility is that the P/E is high because investors think the benign earnings growth will improve 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 EyezInc

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 EyezInc's earnings, revenue and cash flow.

Is There Enough Growth For EyezInc?

The only time you'd be truly comfortable seeing a P/E as steep as EyezInc's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. This isn't what shareholders were looking for as it means they've been left with a 55% decline in EPS over the last three years in total. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 9.9% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that EyezInc's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 EyezInc's P/E

The strong share price surge has got EyezInc's P/E rushing to great heights as well. 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 EyezInc revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with EyezInc (at least 2 which don't sit too well with us), and understanding them should be part of your investment process.

You might be able to find a better investment than EyezInc. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.