Hokuriku Electric Industry Co.,Ltd.'s (TSE:6989) Share Price Boosted 26% But Its Business Prospects Need A Lift Too

Hokuriku Electric Industry Co.,Ltd. (TSE:6989) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 83%.

Even after such a large jump in price, Hokuriku Electric IndustryLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 9.1x, since almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 22x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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With earnings growth that's exceedingly strong of late, Hokuriku Electric IndustryLtd has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Hokuriku Electric IndustryLtd

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 Hokuriku Electric IndustryLtd's earnings, revenue and cash flow.

Is There Any Growth For Hokuriku Electric IndustryLtd?

Hokuriku Electric IndustryLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. Still, incredibly EPS has fallen 14% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.1% shows it's an unpleasant look.

In light of this, it's understandable that Hokuriku Electric IndustryLtd's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Final Word

Despite Hokuriku Electric IndustryLtd's shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hokuriku Electric IndustryLtd maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Hokuriku Electric IndustryLtd you should know about.

You might be able to find a better investment than Hokuriku Electric IndustryLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.