Earnings Tell The Story For SEIKOH GIKEN Co., Ltd. (TSE:6834) As Its Stock Soars 30%

SEIKOH GIKEN Co., Ltd. (TSE:6834) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 231% in the last year.

Since its price has surged higher, SEIKOH GIKEN's price-to-earnings (or "P/E") ratio of 33.1x 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.

With earnings growth that's superior to most other companies of late, SEIKOH GIKEN has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See 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.

Is There Enough Growth For SEIKOH GIKEN?

SEIKOH GIKEN'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 an exceptional 68% gain to the company's bottom line. EPS has also lifted 8.2% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 26% each year over the next three years. That's shaping up to be materially higher than the 10% per annum 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

Shares in SEIKOH GIKEN have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of SEIKOH GIKEN's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for SEIKOH GIKEN you should be aware of.

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.