Earnings Not Telling The Story For Mamezo Digital Holdings Co., Ltd. (TSE:202A) After Shares Rise 26%

Mamezo Digital Holdings Co., Ltd. (TSE:202A) shares have had a really impressive month, gaining 26% after a shaky period beforehand. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Mamezo Digital Holdings as a stock to potentially avoid with its 18.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Mamezo Digital Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Mamezo Digital Holdings

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

Is There Enough Growth For Mamezo Digital Holdings?

The only time you'd be truly comfortable seeing a P/E as high as Mamezo Digital Holdings' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. The latest three year period has also seen a 26% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 8.8% over the next year. Meanwhile, the rest of the market is forecast to expand by 8.1%, which is not materially different.

In light of this, it's curious that Mamezo Digital 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 Mamezo Digital Holdings' P/E?

Mamezo Digital Holdings shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Mamezo Digital Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Mamezo Digital Holdings with six simple checks.

If you're unsure about the strength of Mamezo Digital Holdings' 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.