Earnings Tell The Story For Kadokawa Corporation (TSE:9468) As Its Stock Soars 30%

Those holding Kadokawa Corporation (TSE:9468) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Kadokawa as a stock to avoid entirely with its 36.2x 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.

Kadokawa certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Kadokawa

Want the full picture on analyst estimates for the company? Then our free report on Kadokawa will help you uncover what's on the horizon.

How Is Kadokawa's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 8.2% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 28% each year as estimated by the seven analysts watching the company. With the market only predicted to deliver 9.4% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Kadokawa is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

Kadokawa's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Kadokawa maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Kadokawa has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.