Market Cool On Meiko Electronics Co., Ltd.'s (TSE:6787) Earnings

It's not a stretch to say that Meiko Electronics Co., Ltd.'s (TSE:6787) price-to-earnings (or "P/E") ratio of 11.8x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been advantageous for Meiko Electronics as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Meiko Electronics

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

Does Growth Match The P/E?

In order to justify its P/E ratio, Meiko Electronics would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 36% last year. The strong recent performance means it was also able to grow EPS by 31% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 8.9% each year, the company is positioned for a stronger earnings result.

In light of this, it's curious that Meiko Electronics' P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Meiko Electronics' P/E?

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 Meiko Electronics currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Meiko Electronics you should be aware of, and 1 of them is significant.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.