Why Investors Shouldn't Be Surprised By Hennge K.K.'s (TSE:4475) 34% Share Price Surge

Despite an already strong run, Hennge K.K. (TSE:4475) shares have been powering on, with a gain of 34% in the last thirty days. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, Hennge K.K's price-to-earnings (or "P/E") ratio of 60.6x 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 13x 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.

Recent times have been quite advantageous for Hennge K.K as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hennge K.K

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 Hennge K.K's earnings, revenue and cash flow.

Is There Enough Growth For Hennge K.K?

In order to justify its P/E ratio, Hennge K.K would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 63% gain to the company's bottom line. Pleasingly, EPS has also lifted 273% 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.

This is in contrast to the rest of the market, which is expected to grow by 12% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Hennge K.K is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

What We Can Learn From Hennge K.K's P/E?

The strong share price surge has got Hennge K.K's P/E rushing to great heights as well. 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.

We've established that Hennge K.K maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Hennge K.K that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.