ikuyo Co.,Ltd.'s (TSE:7273) 30% Share Price Surge Not Quite Adding Up

Despite an already strong run, ikuyo Co.,Ltd. (TSE:7273) shares have been powering on, with a gain of 30% in the last thirty days. The last month tops off a massive increase of 105% in the last year.

After such a large jump in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 11x, you may consider ikuyoLtd as a stock to avoid entirely with its 22.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at ikuyoLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for ikuyoLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on ikuyoLtd will help you shine a light on its historical performance.

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

The only time you'd be truly comfortable seeing a P/E as steep as ikuyoLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 21% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 10% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that ikuyoLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

ikuyoLtd's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of ikuyoLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for ikuyoLtd (1 makes us a bit uncomfortable) you should be aware of.

If you're unsure about the strength of ikuyoLtd's 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.