Optimistic Investors Push Shibaura Mechatronics Corporation (TSE:6590) Shares Up 26% But Growth Is Lacking

Shibaura Mechatronics Corporation (TSE:6590) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 131% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Shibaura Mechatronics' price-to-earnings (or "P/E") ratio of 21.2x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Recent times have been advantageous for Shibaura Mechatronics as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shibaura Mechatronics

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

What Are Growth Metrics Telling Us About The High P/E?

Shibaura Mechatronics' P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 28% last year. The strong recent performance means it was also able to grow EPS by 106% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 1.0% each year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.0% per annum, which is noticeably more attractive.

In light of this, it's alarming that Shibaura Mechatronics' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The large bounce in Shibaura Mechatronics' shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shibaura Mechatronics currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

You might be able to find a better investment than Shibaura Mechatronics. 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.