Kamakura Shinsho, Ltd.'s (TSE:6184) 27% Price Boost Is Out Of Tune With Earnings

Kamakura Shinsho, Ltd. (TSE:6184) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

After such a large jump in price, Kamakura Shinsho may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 34.1x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x 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.

The earnings growth achieved at Kamakura Shinsho over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Kamakura Shinsho

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

How Is Kamakura Shinsho's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 21% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 32% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 10% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

With this information, we find it interesting that Kamakura Shinsho is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Kamakura Shinsho's P/E

The strong share price surge has got Kamakura Shinsho's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Kamakura Shinsho currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Kamakura Shinsho (at least 1 which is a bit concerning), and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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.