JAKKS Pacific, Inc. (NASDAQ:JAKK) shares have had a really impressive month, gaining 38% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.

Even after such a large jump in price, JAKKS Pacific's price-to-earnings (or "P/E") ratio of 2.9x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 16x and even P/E's above 30x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been advantageous for JAKKS Pacific as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for JAKKS Pacific

How Is JAKKS Pacific's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 71% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 55% as estimated by the two analysts watching the company. With the market predicted to deliver 9.4% growth , that's a disappointing outcome.

In light of this, it's understandable that JAKKS Pacific's P/E would sit below the majority of other companies. 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 JAKKS Pacific's P/E?

JAKKS Pacific's recent share price jump still sees its P/E sitting firmly flat on the ground. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of JAKKS Pacific'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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with JAKKS Pacific (including 1 which makes us a bit uncomfortable).

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

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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.