After Leaping 45% SEIKOH GIKEN Co., Ltd. (TSE:6834) Shares Are Not Flying Under The Radar

SEIKOH GIKEN Co., Ltd. (TSE:6834) shares have continued their recent momentum with a 45% gain in the last month alone. The last month tops off a massive increase of 249% in the last year.

Since its price has surged higher, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider SEIKOH GIKEN as a stock to avoid entirely with its 42.4x 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 so lofty.

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With earnings growth that's superior to most other companies of late, SEIKOH GIKEN has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for SEIKOH GIKEN

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

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

The only time you'd be truly comfortable seeing a P/E as steep as SEIKOH GIKEN's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 179% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 129% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 11% each year over the next three years. That's shaping up to be materially higher than the 9.2% per year growth forecast for the broader market.

With this information, we can see why SEIKOH GIKEN is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got SEIKOH GIKEN's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that SEIKOH GIKEN maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with SEIKOH GIKEN.

Of course, you might also be able to find a better stock than SEIKOH GIKEN. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.