Even With A 38% Surge, Cautious Investors Are Not Rewarding Meiho Enterprise Co., Ltd.'s (TSE:8927) Performance Completely

Meiho Enterprise Co., Ltd. (TSE:8927) shares have continued their recent momentum with a 38% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 48%.

Even after such a large jump in price, there still wouldn't be many who think Meiho Enterprise's price-to-earnings (or "P/E") ratio of 16.3x is worth a mention when the median P/E in Japan is similar at about 15x. 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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For example, consider that Meiho Enterprise's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Meiho Enterprise

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

How Is Meiho Enterprise's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Meiho Enterprise's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 131% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Meiho Enterprise is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Bottom Line On Meiho Enterprise's P/E

Meiho Enterprise appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Meiho Enterprise revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

Having said that, be aware Meiho Enterprise is showing 4 warning signs in our investment analysis, and 2 of those don't sit too well with us.

Of course, you might also be able to find a better stock than Meiho Enterprise. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.