What Daiseki Eco. Solution Co., Ltd.'s (TSE:1712) 49% Share Price Gain Is Not Telling You

Daiseki Eco. Solution Co., Ltd. (TSE:1712) shares have continued their recent momentum with a 49% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 56%.

After such a large jump in price, Daiseki Eco. Solution may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 21.2x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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With earnings growth that's superior to most other companies of late, Daiseki Eco. Solution has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Daiseki Eco. Solution

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Daiseki Eco. Solution.

How Is Daiseki Eco. Solution's Growth Trending?

Daiseki Eco. Solution's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. The latest three year period has also seen an excellent 116% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 8.6% per annum over the next three years. That's shaping up to be similar to the 9.5% per annum growth forecast for the broader market.

With this information, we find it interesting that Daiseki Eco. Solution is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Daiseki Eco. Solution's P/E

The large bounce in Daiseki Eco. Solution's shares has lifted the company's P/E to a fairly high level. 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.

Our examination of Daiseki Eco. Solution's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Daiseki Eco. Solution that you need to take into consideration.

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.