Market Participants Recognise Canon Electronics Inc.'s (TSE:7739) Earnings Pushing Shares 26% Higher

Those holding Canon Electronics Inc. (TSE:7739) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Canon Electronics' P/E ratio of 13x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

As an illustration, earnings have deteriorated at Canon Electronics over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Canon Electronics

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Canon Electronics' earnings, revenue and cash flow.

Does Growth Match The P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 2.8%. Even so, admirably EPS has lifted 41% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

With this information, we can see why Canon Electronics is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average growth rates continue into the future and are only willing to pay a moderate amount for the stock.

The Final Word

Canon Electronics appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

As we suspected, our examination of Canon Electronics revealed its three-year earnings trends are contributing to its P/E, given they look similar to current market expectations. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless the recent medium-term conditions change, they will continue to support the share price at these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Canon Electronics that you should be aware of.

If you're unsure about the strength of Canon Electronics' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.