What J. Front Retailing Co., Ltd.'s (TSE:3086) 26% Share Price Gain Is Not Telling You

J. Front Retailing Co., Ltd. (TSE:3086) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 41%.

Although its price has surged higher, you could still be forgiven for feeling indifferent about J. Front Retailing's P/E ratio of 14.4x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 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.

With earnings growth that's superior to most other companies of late, J. Front Retailing has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for J. Front Retailing

Keen to find out how analysts think J. Front Retailing's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For J. Front Retailing?

In order to justify its P/E ratio, J. Front Retailing would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 137% 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. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.0% per annum as estimated by the five analysts watching the company. That's not great when the rest of the market is expected to grow by 9.7% each year.

In light of this, it's somewhat alarming that J. Front Retailing's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Bottom Line On J. Front Retailing's P/E

J. Front Retailing appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of J. Front Retailing's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware J. Front Retailing is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

If you're unsure about the strength of J. Front Retailing's 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com