Art Vivant Co., Ltd. (TSE:7523) Soars 33% But It's A Story Of Risk Vs Reward

Art Vivant Co., Ltd. (TSE:7523) shareholders have had their patience rewarded with a 33% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 34%.

Although its price has surged higher, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Art Vivant as an attractive investment with its 10.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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For instance, Art Vivant's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Art Vivant

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Art Vivant's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The Low P/E?

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

Retrospectively, the last year delivered a frustrating 8.2% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 33% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

In light of this, it's peculiar that Art Vivant's P/E sits below the majority of other companies. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift Art Vivant'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 Art Vivant currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. 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.

Before you settle on your opinion, we've discovered 4 warning signs for Art Vivant (2 are potentially serious!) that you should be aware of.

Of course, you might also be able to find a better stock than Art Vivant. 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.