There's Reason For Concern Over Dai-Dan Co., Ltd.'s (TSE:1980) Massive 26% Price Jump

The Dai-Dan Co., Ltd. (TSE:1980) share price has done very well over the last month, posting an excellent gain of 26%. The last month tops off a massive increase of 147% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Dai-Dan's price-to-earnings (or "P/E") ratio of 13x is worth a mention when the median P/E in Japan is similar at about 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's superior to most other companies of late, Dai-Dan has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Dai-Dan

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dai-Dan.

Does Growth Match The P/E?

In order to justify its P/E ratio, Dai-Dan would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 102% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 156% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 3.6% per annum over the next three years. With the market predicted to deliver 10% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Dai-Dan is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

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

Dai-Dan's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that Dai-Dan currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Dai-Dan, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.