IKKA Holdings (Cayman) Limited's (TWSE:2250) 26% Price Boost Is Out Of Tune With Earnings

IKKA Holdings (Cayman) Limited (TWSE:2250) 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 74%.

Although its price has surged higher, you could still be forgiven for feeling indifferent about IKKA Holdings (Cayman)'s P/E ratio of 23x, since the median price-to-earnings (or "P/E") ratio in Taiwan is also close to 22x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's exceedingly strong of late, IKKA Holdings (Cayman) has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for IKKA Holdings (Cayman)

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 IKKA Holdings (Cayman)'s earnings, revenue and cash flow.

How Is IKKA Holdings (Cayman)'s Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like IKKA Holdings (Cayman)'s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 274% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 23% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's somewhat alarming that IKKA Holdings (Cayman)'s P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

IKKA Holdings (Cayman) appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that IKKA Holdings (Cayman) currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with IKKA Holdings (Cayman) (including 2 which are concerning).

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.