There's Reason For Concern Over Hirata Corporation's (TSE:6258) Massive 26% Price Jump

Despite an already strong run, Hirata Corporation (TSE:6258) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

Even after such a large jump in price, there still wouldn't be many who think Hirata's price-to-earnings (or "P/E") ratio of 15.5x is worth a mention when the median P/E in Japan is similar at about 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Hirata certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

Check out our latest analysis for Hirata

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

Is There Some Growth For Hirata?

The only time you'd be comfortable seeing a P/E like Hirata's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 80%. The strong recent performance means it was also able to grow EPS by 80% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 0.9% as estimated by the four analysts watching the company. With the market predicted to deliver 11% growth , that's a disappointing outcome.

In light of this, it's somewhat alarming that Hirata's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Bottom Line On Hirata's P/E

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

Our examination of Hirata's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Hirata with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Hirata. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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.