Isetan Mitsukoshi Holdings Ltd.'s (TSE:3099) 30% Price Boost Is Out Of Tune With Earnings

Isetan Mitsukoshi Holdings Ltd. ( TSE:3099 ) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 28% in the last twelve months.

After such a large jump in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Isetan Mitsukoshi Holdings as a stock to potentially avoid with its 15.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

We've discovered 1 warning sign about Isetan Mitsukoshi Holdings. View them for free.

While the market has experienced earnings growth lately, Isetan Mitsukoshi Holdings' earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Isetan Mitsukoshi Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Isetan Mitsukoshi Holdings .

Does Growth Match The High P/E?

In order to justify its P/E ratio, Isetan Mitsukoshi Holdings would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 2.3% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 347% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 9.5% each year as estimated by the six analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.5% per annum, which is not materially different.

In light of this, it's curious that Isetan Mitsukoshi Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Isetan Mitsukoshi Holdings' P/E?

Isetan Mitsukoshi Holdings' P/E is getting right up there since its shares have risen strongly. 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 Isetan Mitsukoshi Holdings currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Isetan Mitsukoshi Holdings is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.