Subdued Growth No Barrier To Computer Institute of Japan, Ltd. (TSE:4826) With Shares Advancing 34%

Computer Institute of Japan, Ltd. (TSE:4826) shares have continued their recent momentum with a 34% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 81% in the last year.

Following the firm bounce in price, Computer Institute of Japan's price-to-earnings (or "P/E") ratio of 30.5x 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 14x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

We'd have to say that with no tangible growth over the last year, Computer Institute of Japan's earnings have been unimpressive. One possibility is that the P/E is high because investors think the benign earnings growth will improve 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 Computer Institute of Japan

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 Computer Institute of Japan's earnings, revenue and cash flow.

Does Growth Match The High P/E?

Computer Institute of Japan'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.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period was better as it's delivered a decent 20% overall rise in EPS. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Computer Institute of Japan 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Computer Institute of Japan's P/E

The strong share price surge has got Computer Institute of Japan's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Computer Institute of Japan currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Computer Institute of Japan (1 is concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Computer Institute of Japan'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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