Yamaichi Electronics Co., Ltd.'s (TSE:6941) 48% Jump Shows Its Popularity With Investors

Yamaichi Electronics Co., Ltd. (TSE:6941) shares have continued their recent momentum with a 48% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 95% in the last year.

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 Yamaichi Electronics as a stock to avoid entirely with its 37.2x 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.

Yamaichi Electronics could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Yamaichi Electronics

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Yamaichi Electronics would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 71%. The last three years don't look nice either as the company has shrunk EPS by 17% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 60% over the next year. That's shaping up to be materially higher than the 9.7% growth forecast for the broader market.

In light of this, it's understandable that Yamaichi Electronics' 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.

What We Can Learn From Yamaichi Electronics' P/E?

Yamaichi Electronics' P/E is flying high just like its stock has during the last month. 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.

We've established that Yamaichi Electronics maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Yamaichi Electronics that you need to be mindful of.

Of course, you might also be able to find a better stock than Yamaichi Electronics. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.