Furuno Electric Co., Ltd.'s (TSE:6814) 54% Share Price Surge Not Quite Adding Up

Furuno Electric Co., Ltd. (TSE:6814) shares have continued their recent momentum with a 54% gain in the last month alone. The last month tops off a massive increase of 267% in the last year.

Although its price has surged higher, it's still not a stretch to say that Furuno Electric's price-to-earnings (or "P/E") ratio of 15.4x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

With earnings growth that's superior to most other companies of late, Furuno Electric has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

See our latest analysis for Furuno Electric

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

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Furuno Electric's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 107%. The latest three year period has also seen an excellent 998% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 8.5% per annum as estimated by the three analysts watching the company. Meanwhile, the broader market is forecast to expand by 9.3% per year, which paints a poor picture.

In light of this, it's somewhat alarming that Furuno Electric's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Final Word

Furuno Electric's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Furuno Electric's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Furuno Electric has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Furuno Electric, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.