Investors Appear Satisfied With Micronics Japan Co., Ltd.'s (TSE:6871) Prospects As Shares Rocket 30%

Micronics Japan Co., Ltd. (TSE:6871) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Micronics Japan as a stock to avoid entirely with its 22x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Micronics Japan certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

Check out our latest analysis for Micronics Japan

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

How Is Micronics Japan's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. Still, incredibly EPS has fallen 2.0% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 32% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 13% growth forecast for the broader market.

With this information, we can see why Micronics Japan 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 Bottom Line On Micronics Japan's P/E

Micronics Japan's P/E is flying high just like its stock has during the last month. 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 Micronics Japan maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Micronics Japan, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.