It's A Story Of Risk Vs Reward With Cross Cat Co., Ltd. (TSE:2307)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may consider Cross Cat Co., Ltd. (TSE:2307) as an attractive investment with its 11.3x 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 limited.

Cross Cat certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Cross Cat

Although there are no analyst estimates available for Cross Cat, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Growth For Cross Cat?

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

If we review the last year of earnings growth, the company posted a terrific increase of 53%. The latest three year period has also seen an excellent 159% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 13% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Cross Cat is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Cross Cat's P/E?

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 Cross Cat revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Cross Cat (of which 1 is a bit unpleasant!) you should know about.

If you're unsure about the strength of Cross Cat's 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.