Ryohin Keikaku Co., Ltd.'s (TSE:7453) Shares Climb 27% But Its Business Is Yet to Catch Up

The Ryohin Keikaku Co., Ltd. (TSE:7453) share price has done very well over the last month, posting an excellent gain of 27%. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Ryohin Keikaku may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26x, since almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Our free stock report includes 1 warning sign investors should be aware of before investing in Ryohin Keikaku. Read for free now.

Ryohin Keikaku 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Ryohin Keikaku

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

Is There Enough Growth For Ryohin Keikaku?

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

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. Pleasingly, EPS has also lifted 80% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 2.9% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.8% each year, which is noticeably more attractive.

With this information, we find it concerning that Ryohin Keikaku is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Ryohin Keikaku's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Ryohin Keikaku currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Ryohin Keikaku that we have uncovered.

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.