Market Participants Recognise KFC Holdings Japan, Ltd.'s (TSE:9873) Earnings Pushing Shares 41% Higher

Despite an already strong run, KFC Holdings Japan, Ltd. (TSE:9873) shares have been powering on, with a gain of 41% in the last thirty days. The last month tops off a massive increase of 124% in the last year.

Since its price has surged higher, KFC Holdings Japan's price-to-earnings (or "P/E") ratio of 33x 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.

Recent times have been quite advantageous for KFC Holdings Japan as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

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.

If we review the last year of earnings growth, the company posted a terrific increase of 74%. Pleasingly, EPS has also lifted 55% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 9.7% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why KFC Holdings Japan is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From KFC Holdings Japan's P/E?

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

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.

You always need to take note of risks, for example - KFC Holdings Japan has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than KFC Holdings Japan. 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.