Market Participants Recognise Micronics Japan Co., Ltd.'s (TSE:6871) Earnings Pushing Shares 76% Higher

Despite an already strong run, Micronics Japan Co., Ltd. (TSE:6871) shares have been powering on, with a gain of 76% in the last thirty days. The last 30 days were the cherry on top of the stock's 441% gain in the last year, which is nothing short of spectacular.

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 14x, you may consider Micronics Japan as a stock to avoid entirely with its 67.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Micronics Japan 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.

See 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.

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

Micronics Japan's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 45%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 49% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 60% each year as estimated by the two analysts watching the company. With the market only predicted to deliver 9.9% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Micronics Japan's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Micronics Japan have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Micronics Japan'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. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Micronics Japan (2 are potentially serious!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.