Subdued Growth No Barrier To Okumura Corporation (TSE:1833) With Shares Advancing 27%

The Okumura Corporation (TSE:1833) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 60%.

After such a large jump in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Okumura as a stock to potentially avoid with its 17.1x P/E ratio. 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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Okumura certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Okumura

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 Okumura's earnings, revenue and cash flow.

Is There Enough Growth For Okumura?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 104% last year. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.2% shows it's about the same on an annualised basis.

With this information, we find it interesting that Okumura is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Okumura's P/E?

Okumura's P/E is getting right up there since its shares have risen strongly. 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 Okumura currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like growth, 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 risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Okumura (1 shouldn't be ignored!) that you need to be mindful of.

You might be able to find a better investment than Okumura. 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.