What JCU Corporation's (TSE:4975) 31% Share Price Gain Is Not Telling You

Explore JCU's Fair Values from the Community and select yours

The JCU Corporation (TSE:4975) share price has done very well over the last month, posting an excellent gain of 31%. Looking further back, the 23% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, it's still not a stretch to say that JCU's price-to-earnings (or "P/E") ratio of 12.7x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 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.

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With earnings growth that's superior to most other companies of late, JCU has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

View our latest analysis for JCU

If you'd like to see what analysts are forecasting going forward, you should check out our free report on JCU.

Is There Some Growth For JCU?

The only time you'd be comfortable seeing a P/E like JCU's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 33%. The strong recent performance means it was also able to grow EPS by 36% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 4.6% per annum as estimated by the sole analyst watching the company. With the market predicted to deliver 10% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that JCU 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 JCU's P/E?

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

We've established that JCU currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for JCU you should be aware of.

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

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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.