Kyokuto Kaihatsu Kogyo Co.,Ltd. (TSE:7226) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

Kyokuto Kaihatsu Kogyo Co.,Ltd. (TSE:7226) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 71% in the last year.

Following the firm bounce in price, Kyokuto Kaihatsu KogyoLtd's price-to-earnings (or "P/E") ratio of 21.5x 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 14x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For instance, Kyokuto Kaihatsu KogyoLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Kyokuto Kaihatsu KogyoLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Kyokuto Kaihatsu KogyoLtd's earnings, revenue and cash flow.

Is There Enough Growth For Kyokuto Kaihatsu KogyoLtd?

The only time you'd be truly comfortable seeing a P/E as high as Kyokuto Kaihatsu KogyoLtd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 59%. As a result, earnings from three years ago have also fallen 28% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Kyokuto Kaihatsu KogyoLtd 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in Kyokuto Kaihatsu KogyoLtd's shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Kyokuto Kaihatsu KogyoLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 4 warning signs we've spotted with Kyokuto Kaihatsu KogyoLtd.

You might be able to find a better investment than Kyokuto Kaihatsu KogyoLtd. 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.