Dai-Dan Co., Ltd.'s (TSE:1980) 31% Share Price Surge Not Quite Adding Up

Dai-Dan Co., Ltd. (TSE:1980) shares have continued their recent momentum with a 31% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 99% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Dai-Dan's price-to-earnings (or "P/E") ratio of 12.8x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

The earnings growth achieved at Dai-Dan over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Check out our latest analysis for Dai-Dan

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 Dai-Dan's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Dai-Dan's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 15% last year. As a result, it also grew EPS by 18% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Dai-Dan's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Bottom Line On Dai-Dan's P/E

Its shares have lifted substantially and now Dai-Dan's P/E is also back up to the market median. 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.

We've established that Dai-Dan currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Dai-Dan that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.