Japan System Techniques Co., Ltd. (TSE:4323) Looks Just Right With A 25% Price Jump

Despite an already strong run, Japan System Techniques Co., Ltd. (TSE:4323) shares have been powering on, with a gain of 25% in the last thirty days. The annual gain comes to 147% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Japan System Techniques may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 29.4x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Japan System Techniques recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Japan System Techniques

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Japan System Techniques' earnings, revenue and cash flow.

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

Japan System Techniques' 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.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.6% last year. Pleasingly, EPS has also lifted 385% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Japan System Techniques' P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

Shares in Japan System Techniques have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Japan System Techniques maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Japan System Techniques is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Japan System Techniques' 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.