There's Reason For Concern Over SEIKOH GIKEN Co., Ltd.'s (TSE:6834) Massive 26% Price Jump

SEIKOH GIKEN Co., Ltd. (TSE:6834) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 175% 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 21.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent times have been advantageous for SEIKOH GIKEN as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for SEIKOH GIKEN

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like SEIKOH GIKEN's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 179% last year. The latest three year period has also seen an excellent 129% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 0.4% per annum during the coming three years according to the two analysts following the company. Meanwhile, the broader market is forecast to expand by 9.9% each year, which paints a poor picture.

In light of this, it's alarming that SEIKOH GIKEN's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Bottom Line On SEIKOH GIKEN's P/E

SEIKOH GIKEN's P/E is flying high just like its stock has during the last month. 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.

Our examination of SEIKOH GIKEN's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for SEIKOH GIKEN that we have uncovered.

If you're unsure about the strength of SEIKOH GIKEN'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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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.