Makoto Construction Co,Ltd's (TSE:8995) Popularity With Investors Under Threat As Stock Sinks 27%

The Makoto Construction Co,Ltd (TSE:8995) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Longer-term, the stock has been solid despite a difficult 30 days, gaining 24% in the last year.

In spite of the heavy fall in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may still consider Makoto Construction CoLtd as a stock to avoid entirely with its 45.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at Makoto Construction CoLtd over the last year, which is not ideal at all. 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.

See our latest analysis for Makoto Construction CoLtd

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 Makoto Construction CoLtd's earnings, revenue and cash flow.

How Is Makoto Construction CoLtd's Growth Trending?

Makoto Construction CoLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 64% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

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.

In light of this, it's alarming that Makoto Construction CoLtd'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 Makoto Construction CoLtd's P/E?

Even after such a strong price drop, Makoto Construction CoLtd's P/E still exceeds the rest of the market significantly. 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 Makoto Construction CoLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Makoto Construction CoLtd has 5 warning signs (and 2 which are potentially serious) we think you should know about.

You might be able to find a better investment than Makoto Construction CoLtd. 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.