Goldwin Inc.'s (TSE:8111) Shares Climb 26% But Its Business Is Yet to Catch Up

Goldwin Inc. (TSE:8111) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

After such a large jump in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Goldwin as a stock to potentially avoid with its 18.3x P/E ratio. 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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Goldwin could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Goldwin

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

Does Growth Match The High P/E?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.2%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 31% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 8.7% per annum over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.3% per year, which is not materially different.

With this information, we find it interesting that Goldwin 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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

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

We've established that Goldwin currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Goldwin that you should be aware of.

You might be able to find a better investment than Goldwin. 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.