Market Participants Recognise Sumco Corporation's (TSE:3436) Earnings Pushing Shares 34% Higher

Those holding Sumco Corporation (TSE:3436) shares would be relieved that the share price has rebounded 34% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 59% share price decline over the last year.

Following the firm bounce in price, Sumco's price-to-earnings (or "P/E") ratio of 17.6x might make it look like a 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 as high as it is.

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

Sumco could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Sumco

Want the full picture on analyst estimates for the company? Then our free report on Sumco will help you uncover what's on the horizon.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Sumco'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 69%. This means it has also seen a slide in earnings over the longer-term as EPS is down 58% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 32% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.8% each year growth forecast for the broader market.

In light of this, it's understandable that Sumco'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.

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

Sumco shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of Sumco's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Having said that, be aware Sumco is showing 4 warning signs in our investment analysis, and 2 of those make us uncomfortable.

Of course, you might also be able to find a better stock than Sumco. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.