Fabrica Holdings Co., Ltd.'s (TSE:4193) 35% Jump Shows Its Popularity With Investors

Fabrica Holdings Co., Ltd. (TSE:4193) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

Following the firm bounce in price, Fabrica Holdings' price-to-earnings (or "P/E") ratio of 43x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Fabrica Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Fabrica Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Fabrica Holdings.

Is There Enough Growth For Fabrica Holdings?

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

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 49% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 36% per year over the next three years. With the market only predicted to deliver 8.9% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Fabrica Holdings' 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 Fabrica Holdings' P/E?

Fabrica Holdings' 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.

As we suspected, our examination of Fabrica Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Fabrica Holdings, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Fabrica Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.