Improved Earnings Required Before Buffalo Inc. (TSE:6676) Stock's 27% Jump Looks Justified

Buffalo Inc. (TSE:6676) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 93% in the last year.

Although its price has surged higher, Buffalo may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.1x, since almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 23x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Buffalo has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Buffalo

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

Is There Any Growth For Buffalo?

The only time you'd be truly comfortable seeing a P/E as depressed as Buffalo's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 157%. The latest three year period has also seen a 26% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 16% per year during the coming three years according to the lone analyst following the company. Meanwhile, the broader market is forecast to expand by 9.3% each year, which paints a poor picture.

In light of this, it's understandable that Buffalo's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What We Can Learn From Buffalo's P/E?

Shares in Buffalo are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

As we suspected, our examination of Buffalo's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Buffalo you should be aware of, and 1 of them shouldn't be ignored.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.