Subdued Growth No Barrier To Hoden Seimitsu Kako Kenkyusho Co., Ltd. (TSE:6469) With Shares Advancing 34%

Hoden Seimitsu Kako Kenkyusho Co., Ltd. (TSE:6469) shares have had a really impressive month, gaining 34% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 6.6% isn't as impressive.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Hoden Seimitsu Kako Kenkyusho as a stock to avoid entirely with its 25.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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With earnings growth that's superior to most other companies of late, Hoden Seimitsu Kako Kenkyusho has been doing relatively well. 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 Hoden Seimitsu Kako Kenkyusho

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

Is There Enough Growth For Hoden Seimitsu Kako Kenkyusho?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Hoden Seimitsu Kako Kenkyusho's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 79% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 72% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to slump, contracting by 13% during the coming year according to the two analysts following the company. That's not great when the rest of the market is expected to grow by 9.7%.

With this information, we find it concerning that Hoden Seimitsu Kako Kenkyusho is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Key Takeaway

Hoden Seimitsu Kako Kenkyusho's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hoden Seimitsu Kako Kenkyusho currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Hoden Seimitsu Kako Kenkyusho.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.