Market Participants Recognise Matsuya Co., Ltd.'s (TSE:8237) Earnings Pushing Shares 25% Higher

Matsuya Co., Ltd. (TSE:8237) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking further back, the 15% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, Matsuya's price-to-earnings (or "P/E") ratio of 25.1x 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Matsuya hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

View our latest analysis for Matsuya

Keen to find out how analysts think Matsuya's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Matsuya?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Matsuya's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.3% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 138% 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.

Looking ahead now, EPS is anticipated to climb by 33% during the coming year according to the sole analyst following the company. That's shaping up to be materially higher than the 9.3% growth forecast for the broader market.

In light of this, it's understandable that Matsuya's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Matsuya's P/E

The strong share price surge has got Matsuya's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Matsuya 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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Matsuya you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.