Subdued Growth No Barrier To Shibaura Mechatronics Corporation (TSE:6590) With Shares Advancing 29%

Shibaura Mechatronics Corporation (TSE:6590) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Shibaura Mechatronics' P/E ratio of 12.2x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's superior to most other companies of late, Shibaura Mechatronics has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Shibaura Mechatronics

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Is There Some Growth For Shibaura Mechatronics?

There's an inherent assumption that a company should be matching the market for P/E ratios like Shibaura Mechatronics' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. Pleasingly, EPS has also lifted 250% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 6.0% each year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 8.5% each year, which is noticeably more attractive.

With this information, we find it interesting that Shibaura Mechatronics is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Shibaura Mechatronics' P/E?

Shibaura Mechatronics' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shibaura Mechatronics currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Shibaura Mechatronics (including 2 which are a bit unpleasant).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.