Keifuku Electric Railroad Co.,Ltd. (TSE:9049) Shares Fly 25% But Investors Aren't Buying For Growth

Keifuku Electric Railroad Co.,Ltd. (TSE:9049) shares have continued their recent momentum with a 25% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 96% in the last year.

Although its price has surged higher, Keifuku Electric RailroadLtd's price-to-earnings (or "P/E") ratio of 8.6x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 24x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been quite advantageous for Keifuku Electric RailroadLtd as its earnings have been rising very briskly. 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 that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Keifuku Electric RailroadLtd

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 Keifuku Electric RailroadLtd's earnings, revenue and cash flow.

How Is Keifuku Electric RailroadLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Keifuku Electric RailroadLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 81% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Keifuku Electric RailroadLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

What We Can Learn From Keifuku Electric RailroadLtd's P/E?

Despite Keifuku Electric RailroadLtd'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.

As we suspected, our examination of Keifuku Electric RailroadLtd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Keifuku Electric RailroadLtd, and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Keifuku Electric RailroadLtd. 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.