Shikino High-Tech CO.,LTD.'s (TSE:6614) 27% Share Price Surge Not Quite Adding Up

Those holding Shikino High-Tech CO.,LTD. (TSE:6614) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 57% share price drop in the last twelve months.

Following the firm bounce in price, Shikino High-TechLTD's price-to-earnings (or "P/E") ratio of 30.7x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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For instance, Shikino High-TechLTD's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Shikino High-TechLTD

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 Shikino High-TechLTD's earnings, revenue and cash flow.

Is There Enough Growth For Shikino High-TechLTD?

Shikino High-TechLTD's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 70%. This means it has also seen a slide in earnings over the longer-term as EPS is down 44% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.7% shows it's an unpleasant look.

With this information, we find it concerning that Shikino High-TechLTD is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Shikino High-TechLTD's P/E

Shares in Shikino High-TechLTD have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shikino High-TechLTD revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Shikino High-TechLTD (1 makes us a bit uncomfortable!) 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.