The Price Is Right For Fixstars Corporation (TSE:3687) Even After Diving 39%

Fixstars Corporation (TSE:3687) shareholders that were waiting for something to happen have been dealt a blow with a 39% share price drop in the last month. Longer-term shareholders would now have taken a real hit with the stock declining 9.9% in the last year.

In spite of the heavy fall in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may still consider Fixstars as a stock to avoid entirely with its 24.5x 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.

Recent times have been advantageous for Fixstars as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Fixstars

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

Is There Enough Growth For Fixstars?

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

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. Pleasingly, EPS has also lifted 196% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 16% per year over the next three years. That's shaping up to be materially higher than the 9.6% per year growth forecast for the broader market.

With this information, we can see why Fixstars 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.

What We Can Learn From Fixstars' P/E?

A significant share price dive has done very little to deflate Fixstars' very lofty P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Fixstars' 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.

Before you settle on your opinion, we've discovered 1 warning sign for Fixstars that you should be aware of.

If you're unsure about the strength of Fixstars' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com