Earnings Tell The Story For CL Holdings Inc. (TSE:4286) As Its Stock Soars 31%

CL Holdings Inc. (TSE:4286) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. The last month tops off a massive increase of 103% in the last year.

Since its price has surged higher, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider CL Holdings as a stock to avoid entirely with its 22.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, CL Holdings has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for CL Holdings

Keen to find out how analysts think CL Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like CL Holdings' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 219%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 39% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 17% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.6% each year, which is noticeably less attractive.

In light of this, it's understandable that CL Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From CL Holdings' P/E?

The strong share price surge has got CL Holdings' P/E rushing to great heights as well. 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.

As we suspected, our examination of CL Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - CL Holdings has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com