Earnings Tell The Story For KFC Holdings Japan, Ltd. (TSE:9873) As Its Stock Soars 27%

Despite an already strong run, KFC Holdings Japan, Ltd. (TSE:9873) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.

Since its price has surged higher, KFC Holdings Japan's price-to-earnings (or "P/E") ratio of 22.6x 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, KFC Holdings Japan has been doing very well. 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 KFC Holdings Japan

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 KFC Holdings Japan's earnings, revenue and cash flow.

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

KFC Holdings Japan'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 an exceptional 45% gain to the company's bottom line. Pleasingly, EPS has also lifted 316% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that KFC Holdings Japan's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

Shares in KFC Holdings Japan have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of KFC Holdings Japan revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for KFC Holdings Japan with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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