Kanro Inc.'s (TSE:2216) 32% Price Boost Is Out Of Tune With Earnings

Kanro Inc. (TSE:2216) shareholders have had their patience rewarded with a 32% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Kanro's P/E ratio of 14.6x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Kanro as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Kanro

Want the full picture on analyst estimates for the company? Then our free report on Kanro will help you uncover what's on the horizon.

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

In order to justify its P/E ratio, Kanro would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 61% gain to the company's bottom line. Pleasingly, EPS has also lifted 307% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 2.1% per year as estimated by the lone analyst watching the company. That's shaping up to be materially lower than the 9.4% per annum growth forecast for the broader market.

With this information, we find it interesting that Kanro is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Kanro's P/E?

Kanro's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Kanro's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 1 warning sign for Kanro that you should be aware of.

Of course, you might also be able to find a better stock than Kanro. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.