There's Reason For Concern Over Daifuku Co., Ltd.'s (TSE:6383) Massive 26% Price Jump

Daifuku Co., Ltd. (TSE:6383) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, Daifuku may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 20.7x, since almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Daifuku certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Daifuku

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How Is Daifuku's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Daifuku's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 85% gain to the company's bottom line. Pleasingly, EPS has also lifted 117% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 0.4% per year over the next three years. With the market predicted to deliver 9.2% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Daifuku is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Daifuku's P/E?

The strong share price surge has got Daifuku's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Daifuku currently trades on a much 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Daifuku that we have uncovered.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.