KOIKE-YA Inc. (TSE:2226) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

The KOIKE-YA Inc. (TSE:2226) share price has done very well over the last month, posting an excellent gain of 26%. The last 30 days bring the annual gain to a very sharp 37%.

Since its price has surged higher, KOIKE-YA may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 25.7x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

KOIKE-YA certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for KOIKE-YA

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on KOIKE-YA will help you shine a light on its historical performance.

How Is KOIKE-YA's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as KOIKE-YA's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 90%. Pleasingly, EPS has also lifted 73% 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.

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 KOIKE-YA's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

KOIKE-YA's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that KOIKE-YA maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. 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. You can assess many of the main risks through our free balance sheet analysis for KOIKE-YA with six simple checks.

Of course, you might also be able to find a better stock than KOIKE-YA. 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.