santec Holdings Corporation's (TSE:6777) 28% Price Boost Is Out Of Tune With Earnings

Explore santec Holdings's Fair Values from the Community and select yours

santec Holdings Corporation (TSE:6777) shares have continued their recent momentum with a 28% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

After such a large jump in price, santec Holdings' price-to-earnings (or "P/E") ratio of 16.4x might make it look like a 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 9x are quite common. 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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Recent times haven't been advantageous for santec Holdings as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for santec Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on santec Holdings.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, santec Holdings would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 3.4%. Pleasingly, EPS has also lifted 123% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 8.5% per annum during the coming three years according to the one analyst following the company. With the market predicted to deliver 8.9% growth per annum, the company is positioned for a comparable earnings result.

With this information, we find it interesting that santec Holdings is trading at a high P/E compared to the market. 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.

The Key Takeaway

The large bounce in santec Holdings' shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of santec Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for santec Holdings that you need to be mindful of.

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.