After Leaping 27% Oki Electric Industry Co., Ltd. (TSE:6703) Shares Are Not Flying Under The Radar

Oki Electric Industry Co., Ltd. (TSE:6703) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last month tops off a massive increase of 112% in the last year.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Oki Electric Industry as a stock to potentially avoid with its 16.4x 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 as high as it is.

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Oki Electric Industry 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Oki Electric Industry

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

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

The only time you'd be truly comfortable seeing a P/E as high as Oki Electric Industry's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 61%. Still, the latest three year period has seen an excellent 242% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 9.3% per year growth forecast for the broader market.

In light of this, it's understandable that Oki Electric Industry's 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 Oki Electric Industry's P/E?

Oki Electric Industry shares have received a push in the right direction, but its P/E is elevated too. 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 Oki Electric Industry's 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. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 4 warning signs for Oki Electric Industry that you need to take into consideration.

If these risks are making you reconsider your opinion on Oki Electric Industry, 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.