Market Might Still Lack Some Conviction On KIMURA KOHKI Co.,Ltd. (TSE:6231) Even After 26% Share Price Boost

KIMURA KOHKI Co.,Ltd. (TSE:6231) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 209% in the last year.

Although its price has surged higher, KIMURA KOHKILtd's price-to-earnings (or "P/E") ratio of 11.1x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

KIMURA KOHKILtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for KIMURA KOHKILtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on KIMURA KOHKILtd will help you shine a light on its historical performance.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like KIMURA KOHKILtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 102%. The latest three year period has also seen an excellent 122% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 9.8% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that KIMURA KOHKILtd is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From KIMURA KOHKILtd's P/E?

The latest share price surge wasn't enough to lift KIMURA KOHKILtd's P/E close to the market median. 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 KIMURA KOHKILtd currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Having said that, be aware KIMURA KOHKILtd is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than KIMURA KOHKILtd. 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.