Mitsubishi Kakoki Kaisha, Ltd. (TSE:6331) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 160% following the latest surge, making investors sit up and take notice.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about Mitsubishi Kakoki Kaisha's P/E ratio of 13.1x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Mitsubishi Kakoki Kaisha could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
View our latest analysis for Mitsubishi Kakoki Kaisha
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Mitsubishi Kakoki Kaisha's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 98% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 7.3% per year as estimated by the only analyst watching the company. With the market predicted to deliver 9.5% growth per annum, the company is positioned for a weaker earnings result.
With this information, we find it interesting that Mitsubishi Kakoki Kaisha is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From Mitsubishi Kakoki Kaisha's P/E?
Mitsubishi Kakoki Kaisha appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Mitsubishi Kakoki Kaisha currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about these 2 warning signs we've spotted with Mitsubishi Kakoki Kaisha (including 1 which makes us a bit uncomfortable).
If you're unsure about the strength of Mitsubishi Kakoki Kaisha's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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