Why Investors Shouldn't Be Surprised By Riso Kyoiku Co., Ltd.'s (TSE:4714) 37% Share Price Surge

Riso Kyoiku Co., Ltd. (TSE:4714) shares have had a really impressive month, gaining 37% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.1% in the last twelve months.

After such a large jump in price, Riso Kyoiku's price-to-earnings (or "P/E") ratio of 27.5x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Riso Kyoiku has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Riso Kyoiku

Keen to find out how analysts think Riso Kyoiku's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Riso Kyoiku's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. This was backed up an excellent period prior to see EPS up by 191% in total over the last three years. 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 19% over the next year. With the market only predicted to deliver 11%, the company is positioned for a stronger earnings result.

With this information, we can see why Riso Kyoiku is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Riso Kyoiku's P/E?

The strong share price surge has got Riso Kyoiku's P/E rushing to great heights as well. 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.

We've established that Riso Kyoiku maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Riso Kyoiku (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

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.