Improved Earnings Required Before Furuno Electric Co., Ltd. (TSE:6814) Stock's 32% Jump Looks Justified

Furuno Electric Co., Ltd. (TSE:6814) shares have continued their recent momentum with a 32% gain in the last month alone. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Furuno Electric may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.7x, since almost half of all companies in Japan have P/E ratios greater than 14x and even P/E's higher than 22x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Recent times have been advantageous for Furuno Electric as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out 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.

How Is Furuno Electric's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Furuno Electric's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 115% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 505% 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.

Looking ahead now, EPS is anticipated to slump, contracting by 8.4% per year during the coming three years according to the dual analysts following the company. Meanwhile, the broader market is forecast to expand by 8.9% per year, which paints a poor picture.

With this information, we are not surprised that Furuno Electric is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Furuno Electric's P/E?

Despite Furuno Electric's shares building up a head of steam, its P/E still lags 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.

As we suspected, our examination of Furuno Electric's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Furuno Electric (at least 1 which is a bit concerning), and understanding them should be part of your investment process.

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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.