Meiko Electronics Co., Ltd. (TSE:6787) Soars 32% But It's A Story Of Risk Vs Reward

Despite an already strong run, Meiko Electronics Co., Ltd. (TSE:6787) shares have been powering on, with a gain of 32% in the last thirty days. The last 30 days bring the annual gain to a very sharp 73%.

Even after such a large jump in price, it's still not a stretch to say that Meiko Electronics' price-to-earnings (or "P/E") ratio of 15.8x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 15x. 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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With earnings growth that's superior to most other companies of late, Meiko Electronics has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Meiko Electronics

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What Are Growth Metrics Telling Us About 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 29% last year. EPS has also lifted 13% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the 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. That's shaping up to be materially higher than the 9.6% per annum growth forecast for the broader market.

With this information, we find it interesting that Meiko Electronics is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

Meiko Electronics appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future 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. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. 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 a bit concerning.

You might be able to find a better investment than Meiko Electronics. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.