Sanyei Corporation's (TSE:8119) Price Is Right But Growth Is Lacking After Shares Rocket 36%

Sanyei Corporation (TSE:8119) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 72%.

In spite of the firm bounce in price, Sanyei's price-to-earnings (or "P/E") ratio of 8.2x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 13x and even P/E's above 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

We've discovered 4 warning signs about Sanyei. View them for free.

Sanyei certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

Check out our latest analysis for Sanyei

Although there are no analyst estimates available for Sanyei, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Sanyei's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 177% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 9.7% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Sanyei is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Sanyei's P/E?

Sanyei's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Sanyei revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Sanyei that you should be aware of.

If these risks are making you reconsider your opinion on Sanyei, 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.