Why We're Not Concerned Yet About JAPAN MATERIAL Co., Ltd.'s (TSE:6055) 28% Share Price Plunge

To the annoyance of some shareholders, JAPAN MATERIAL Co., Ltd. (TSE:6055) shares are down a considerable 28% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 60% loss during that time.

In spite of the heavy fall in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 11x, you may still consider JAPAN MATERIAL as a stock to potentially avoid with its 15x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, JAPAN MATERIAL has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. 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.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 29% as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 10% growth forecast for the broader market.

In light of this, it's understandable that JAPAN MATERIAL's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

There's still some solid strength behind JAPAN MATERIAL's P/E, if not its share price lately. 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 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for JAPAN MATERIAL with six simple checks will allow you to discover any risks that could be an issue.

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