Investors Still Aren't Entirely Convinced By Meiho Enterprise Co., Ltd.'s (TSE:8927) Earnings Despite 26% Price Jump

Meiho Enterprise Co., Ltd. (TSE:8927) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

In spite of the firm bounce in price, it's still not a stretch to say that Meiho Enterprise's price-to-earnings (or "P/E") ratio of 12.8x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

As an illustration, earnings have deteriorated at Meiho Enterprise over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Meiho Enterprise

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 Meiho Enterprise's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Meiho Enterprise's to be considered reasonable.

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 39%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 131% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 7.8% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Meiho Enterprise's P/E sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From Meiho Enterprise's P/E?

Meiho Enterprise appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

We've established that Meiho Enterprise currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 5 warning signs for Meiho Enterprise you should be aware of, and 1 of them is potentially serious.

If you're unsure about the strength of Meiho Enterprise's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.