Sun* Inc.'s (TSE:4053) 28% Cheaper Price Remains In Tune With Earnings

The Sun* Inc. (TSE:4053) share price has fared very poorly over the last month, falling by a substantial 28%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 51% loss during that time.

In spite of the heavy fall in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may still consider Sun* as a stock to potentially avoid with its 16x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Sun* 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Sun*

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

How Is Sun*'s Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 42%. The latest three year period has also seen an excellent 71% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the dual analysts following the company. With the market only predicted to deliver 9.5% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Sun*'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.

What We Can Learn From Sun*'s P/E?

Sun*'s P/E hasn't come down all the way after its stock plunged. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Sun* 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. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Sun* you should be aware of.

You might be able to find a better investment than Sun*. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.