Market Might Still Lack Some Conviction On cotta CO.,LTD (TSE:3359) Even After 27% Share Price Boost

cotta CO.,LTD (TSE:3359) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 47% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think cottaLTD's price-to-earnings (or "P/E") ratio of 13.6x is worth a mention when the median P/E in Japan is similar at about 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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With earnings growth that's inferior to most other companies of late, cottaLTD has been relatively sluggish. One possibility is that the P/E is moderate because investors think this lacklustre earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for cottaLTD

Want the full picture on analyst estimates for the company? Then our free report on cottaLTD 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, cottaLTD would need to produce growth that's similar to the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Fortunately, a few good years before that means that it was still able to grow EPS by 25% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 27% over the next year. That's shaping up to be materially higher than the 11% growth forecast for the broader market.

With this information, we find it interesting that cottaLTD is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

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

Its shares have lifted substantially and now cottaLTD's P/E is also back up to the market median. 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.

Our examination of cottaLTD's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with cottaLTD.

Of course, you might also be able to find a better stock than cottaLTD. 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.