Komehyo Holdings Co.,Ltd. (TSE:2780) Shares Fly 31% But Investors Aren't Buying For Growth

Komehyo Holdings Co.,Ltd. (TSE:2780) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 26%.

Even after such a large jump in price, Komehyo HoldingsLtd's price-to-earnings (or "P/E") ratio of 9.7x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 23x are quite common. However, the P/E might be low 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, Komehyo HoldingsLtd has been doing relatively well. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Komehyo HoldingsLtd

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How Is Komehyo HoldingsLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Komehyo HoldingsLtd's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings growth is heading into negative territory, declining 9.8% over the next year. With the market predicted to deliver 9.7% growth , that's a disappointing outcome.

In light of this, it's understandable that Komehyo HoldingsLtd's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

The latest share price surge wasn't enough to lift Komehyo HoldingsLtd's P/E close to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Komehyo HoldingsLtd maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Komehyo HoldingsLtd (1 is a bit unpleasant!) that you should be aware of before investing here.

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.