Aoyama Zaisan Networks Company,Limited (TSE:8929) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

The Aoyama Zaisan Networks Company,Limited (TSE:8929) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

Following the firm bounce in price, Aoyama Zaisan Networks CompanyLimited may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.8x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Aoyama Zaisan Networks CompanyLimited certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is Aoyama Zaisan Networks CompanyLimited's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Aoyama Zaisan Networks CompanyLimited's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 34%. The strong recent performance means it was also able to grow EPS by 68% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.7% per annum during the coming three years according to the two analysts following the company. That's shaping up to be similar to the 10% each year growth forecast for the broader market.

In light of this, it's curious that Aoyama Zaisan Networks CompanyLimited's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Aoyama Zaisan Networks CompanyLimited's P/E

Aoyama Zaisan Networks CompanyLimited's P/E is getting right up there since its shares have risen strongly. 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 Aoyama Zaisan Networks CompanyLimited currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Aoyama Zaisan Networks CompanyLimited that you should be aware of.

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

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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.