Wakou Shokuhin Co., Ltd. (TSE:2813) Shares Fly 48% But Investors Aren't Buying For Growth

The Wakou Shokuhin Co., Ltd. (TSE:2813) share price has done very well over the last month, posting an excellent gain of 48%. The last 30 days bring the annual gain to a very sharp 37%.

Although its price has surged higher, Wakou Shokuhin may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.4x, since almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 24x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For instance, Wakou Shokuhin's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Wakou Shokuhin

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Wakou Shokuhin would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

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

In light of this, it's understandable that Wakou Shokuhin's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Wakou Shokuhin's P/E

Despite Wakou Shokuhin's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Wakou Shokuhin maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Wakou Shokuhin you should be aware of.

If you're unsure about the strength of Wakou Shokuhin's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.