Sumco Corporation's (TSE:3436) Stock Retreats 33% But Earnings Haven't Escaped The Attention Of Investors

Sumco Corporation (TSE:3436) shareholders that were waiting for something to happen have been dealt a blow with a 33% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 15% share price drop.

Although its price has dipped substantially, Sumco's price-to-earnings (or "P/E") ratio of 21.7x might still 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 13x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Sumco 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.

Check out our latest analysis for Sumco

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

Is There Enough Growth For Sumco?

In order to justify its P/E ratio, Sumco would need to produce outstanding growth well in excess of the market.

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 70%. As a result, earnings from three years ago have also fallen 11% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 33% per year over the next three years. That's shaping up to be materially higher than the 9.4% per annum growth forecast for the broader market.

With this information, we can see why Sumco is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

A significant share price dive has done very little to deflate Sumco's very lofty P/E. 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.

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.

Before you take the next step, you should know about the 3 warning signs for Sumco (1 is a bit concerning!) that we have uncovered.

You might be able to find a better investment than Sumco. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.