Investors Still Aren't Entirely Convinced By Japan Aviation Electronics Industry, Limited's (TSE:6807) Earnings Despite 25% Price Jump

Japan Aviation Electronics Industry, Limited (TSE:6807) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Japan Aviation Electronics Industry's P/E ratio of 13x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. 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.

Recent times have been advantageous for Japan Aviation Electronics Industry 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 Japan Aviation Electronics Industry

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

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Japan Aviation Electronics Industry's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. The strong recent performance means it was also able to grow EPS by 79% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.4% each year, which is noticeably less attractive.

With this information, we find it interesting that Japan Aviation Electronics Industry 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.

What We Can Learn From Japan Aviation Electronics Industry's P/E?

Its shares have lifted substantially and now Japan Aviation Electronics Industry's P/E is also back up to the market median. 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.

Our examination of Japan Aviation Electronics Industry's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. 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. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Japan Aviation Electronics Industry with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Japan Aviation Electronics Industry. 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.