Subdued Growth No Barrier To Amita Holdings Co.,Ltd. (TSE:2195) With Shares Advancing 26%

Amita Holdings Co.,Ltd. (TSE:2195) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 42% over that time.

Since its price has surged higher, Amita HoldingsLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 15.7x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Amita HoldingsLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Amita HoldingsLtd

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Is There Enough Growth For Amita HoldingsLtd?

In order to justify its P/E ratio, Amita HoldingsLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 37% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 33% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.6% shows it's an unpleasant look.

In light of this, it's alarming that Amita HoldingsLtd's P/E sits above the majority of other companies. 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.

What We Can Learn From Amita HoldingsLtd's P/E?

Amita HoldingsLtd's P/E is getting right up there since its shares have risen strongly. 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 Amita HoldingsLtd 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Amita HoldingsLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.