U-NEXT HOLDINGS Co.,Ltd.'s (TSE:9418) Shares Climb 32% But Its Business Is Yet to Catch Up

U-NEXT HOLDINGS Co.,Ltd. (TSE:9418) shares have had a really impressive month, gaining 32% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 56%.

After such a large jump in price, U-NEXT HOLDINGSLtd's price-to-earnings (or "P/E") ratio of 21.6x 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. 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.

U-NEXT HOLDINGSLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

See our latest analysis for U-NEXT HOLDINGSLtd

Keen to find out how analysts think U-NEXT HOLDINGSLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For U-NEXT HOLDINGSLtd?

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

If we review the last year of earnings growth, the company posted a terrific increase of 52%. Pleasingly, EPS has also lifted 85% in aggregate from three years ago, thanks to the last 12 months of growth. 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 3.4% over the next year. That's shaping up to be materially lower than the 11% growth forecast for the broader market.

In light of this, it's alarming that U-NEXT HOLDINGSLtd'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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The strong share price surge has got U-NEXT HOLDINGSLtd's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of U-NEXT HOLDINGSLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for U-NEXT HOLDINGSLtd with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.