Koken Boring Machine Co.,Ltd.'s (TSE:6297) 28% Price Boost Is Out Of Tune With Earnings

Koken Boring Machine Co.,Ltd. (TSE:6297) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

Following the firm bounce in price, Koken Boring MachineLtd's price-to-earnings (or "P/E") ratio of 15.6x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x 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 elevated P/E.

Our free stock report includes 4 warning signs investors should be aware of before investing in Koken Boring MachineLtd. Read for free now.

For example, consider that Koken Boring MachineLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Koken Boring MachineLtd

Although there are no analyst estimates available for Koken Boring MachineLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Koken Boring MachineLtd's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. The last three years don't look nice either as the company has shrunk EPS by 3.7% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.7% shows it's an unpleasant look.

With this information, we find it concerning that Koken Boring MachineLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Koken Boring MachineLtd's P/E

Koken Boring MachineLtd's P/E is getting right up there since its shares have risen strongly. 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 Koken Boring MachineLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Koken Boring MachineLtd (2 are a bit unpleasant!) that you should be aware of before investing here.

You might be able to find a better investment than Koken Boring MachineLtd. 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).

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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.