SKY Perfect JSAT Holdings Inc.'s (TSE:9412) Shares Climb 25% But Its Business Is Yet to Catch Up

The SKY Perfect JSAT Holdings Inc. (TSE:9412) share price has done very well over the last month, posting an excellent gain of 25%. The annual gain comes to 108% following the latest surge, making investors sit up and take notice.

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 SKY Perfect JSAT Holdings as a stock to avoid entirely with its 23.3x 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.

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SKY Perfect JSAT Holdings' earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is SKY Perfect JSAT Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as SKY Perfect JSAT Holdings' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 58% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 6.9% each year during the coming three years according to the six analysts following the company. With the market predicted to deliver 9.3% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that SKY Perfect JSAT Holdings' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On SKY Perfect JSAT Holdings' P/E

SKY Perfect JSAT Holdings' P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that SKY Perfect JSAT Holdings currently trades on a much 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 high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for SKY Perfect JSAT Holdings that you should be aware of.

If you're unsure about the strength of SKY Perfect JSAT Holdings' 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.