Serendip Holdings Co.,Ltd. (TSE:7318) Soars 29% But It's A Story Of Risk Vs Reward

Despite an already strong run, Serendip Holdings Co.,Ltd. (TSE:7318) shares have been powering on, with a gain of 29% in the last thirty days. This latest share price bounce rounds out a remarkable 325% gain over the last twelve months.

Although its price has surged higher, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Serendip HoldingsLtd as an attractive investment with its 12.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, Serendip HoldingsLtd has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Serendip HoldingsLtd

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 Serendip HoldingsLtd's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 403% gain to the company's bottom line. The latest three year period has also seen an excellent 2,291% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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

In light of this, it's peculiar that Serendip HoldingsLtd's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Serendip HoldingsLtd's P/E

The latest share price surge wasn't enough to lift Serendip HoldingsLtd's P/E close to the market median. 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.

We've established that Serendip HoldingsLtd currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

You should always think about risks. Case in point, we've spotted 3 warning signs for Serendip HoldingsLtd you should be aware of, and 2 of them don't sit too well with us.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.