After Leaping 25% JAPAN MATERIAL Co., Ltd. (TSE:6055) Shares Are Not Flying Under The Radar

Those holding JAPAN MATERIAL Co., Ltd. (TSE:6055) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Following the firm bounce in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider JAPAN MATERIAL as a stock to potentially avoid with its 18.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 1 warning sign investors should be aware of before investing in JAPAN MATERIAL. Read for free now.

Recent times have been advantageous for JAPAN MATERIAL as its earnings have been rising faster 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.

View our latest analysis for JAPAN MATERIAL

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

What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 39%. EPS has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 19% as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.3%, which is noticeably less attractive.

With this information, we can see why JAPAN MATERIAL 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

JAPAN MATERIAL's P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of JAPAN MATERIAL'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.

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

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

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.