Ishikawa Seisakusho, Ltd.'s (TSE:6208) P/E Is Still On The Mark Following 25% Share Price Bounce

Ishikawa Seisakusho, Ltd. (TSE:6208) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 59%.

Since its price has surged higher, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Ishikawa Seisakusho as a stock to avoid entirely with its 54x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Ishikawa Seisakusho certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View 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.

Is There Enough Growth For Ishikawa Seisakusho?

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. Pleasingly, EPS has also lifted 102% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

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.

In light of this, it's understandable that Ishikawa Seisakusho's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

The strong share price surge has got Ishikawa Seisakusho's P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Ishikawa Seisakusho is showing 4 warning signs in our investment analysis, and 3 of those are a bit unpleasant.

Of course, you might also be able to find a better stock than Ishikawa Seisakusho. 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.

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