Getting In Cheap On Kyudenko Corporation (TSE:1959) Is Unlikely

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Kyudenko Corporation (TSE:1959) as a stock to potentially avoid with its 17.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Kyudenko hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, 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 Kyudenko

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

Is There Enough Growth For Kyudenko?

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

Retrospectively, the last year delivered a frustrating 8.5% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 17% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 10% per year over the next three years. That's shaping up to be similar to the 9.5% per annum growth forecast for the broader market.

With this information, we find it interesting that Kyudenko is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Kyudenko's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Kyudenko that you need to take into consideration.

Of course, you might also be able to find a better stock than Kyudenko. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.