There's Reason For Concern Over Shin Maint Holdings Co.,Ltd.'s (TSE:6086) Massive 27% Price Jump

Shin Maint Holdings Co.,Ltd. (TSE:6086) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 39%.

After such a large jump in price, Shin Maint HoldingsLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.4x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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With earnings growth that's superior to most other companies of late, Shin Maint HoldingsLtd 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 Shin Maint HoldingsLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shin Maint HoldingsLtd.

Is There Enough Growth For Shin Maint HoldingsLtd?

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

Retrospectively, the last year delivered an exceptional 145% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 101% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings growth is heading into negative territory, declining 10% per year over the next three years. That's not great when the rest of the market is expected to grow by 8.6% each year.

With this information, we find it concerning that Shin Maint HoldingsLtd 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 very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On Shin Maint HoldingsLtd's P/E

The large bounce in Shin Maint HoldingsLtd's shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shin Maint HoldingsLtd's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shin Maint HoldingsLtd with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Shin Maint HoldingsLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.