Ishikawa Seisakusho, Ltd.'s (TSE:6208) P/E Is Still On The Mark Following 26% Share Price Bounce

Ishikawa Seisakusho, Ltd. (TSE:6208) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

Following the firm bounce in price, Ishikawa Seisakusho's price-to-earnings (or "P/E") ratio of 41.6x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Ishikawa Seisakusho as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Ishikawa Seisakusho

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 Ishikawa Seisakusho's earnings, revenue and cash flow.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ishikawa Seisakusho's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 50% gain to the company's bottom line. The latest three year period has also seen an excellent 102% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Ishikawa Seisakusho is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Bottom Line On Ishikawa Seisakusho's P/E

Shares in Ishikawa Seisakusho have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Ishikawa Seisakusho maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Ishikawa Seisakusho has 4 warning signs (and 3 which are potentially serious) we think you should know about.

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.