After Leaping 28% Advantage Risk Management Co., Ltd. (TSE:8769) Shares Are Not Flying Under The Radar

The Advantage Risk Management Co., Ltd. (TSE:8769) share price has done very well over the last month, posting an excellent gain of 28%. The last 30 days bring the annual gain to a very sharp 82%.

Since its price has surged higher, Advantage Risk Management may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 23.3x, since almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 8x are not unusual. 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.

We've discovered 4 warning signs about Advantage Risk Management. View them for free.

Advantage Risk Management has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable 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 may be a little nervous about the viability of the share price.

See our latest analysis for Advantage Risk Management

Although there are no analyst estimates available for Advantage Risk Management, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Advantage Risk Management's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Advantage Risk Management'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 worthy increase of 4.4%. The latest three year period has also seen an excellent 91% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Advantage Risk Management is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From Advantage Risk Management's P/E?

The strong share price surge has got Advantage Risk Management's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Advantage Risk Management revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Advantage Risk Management is showing 4 warning signs in our investment analysis, and 2 of those can't be ignored.

You might be able to find a better investment than Advantage Risk Management. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.