Kaori Heat Treatment Co., Ltd. (TWSE:8996) Shares Slammed 27% But Getting In Cheap Might Be Difficult Regardless

The Kaori Heat Treatment Co., Ltd. (TWSE:8996) share price has fared very poorly over the last month, falling by a substantial 27%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Even after such a large drop in price, Kaori Heat Treatment's price-to-earnings (or "P/E") ratio of 34.2x might still make it look like a strong sell right now compared to the market in Taiwan, where around half of the companies have P/E ratios below 19x and even P/E's below 14x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's inferior to most other companies of late, Kaori Heat Treatment has been relatively sluggish. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Kaori Heat Treatment

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Is There Enough Growth For Kaori Heat Treatment?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 289% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 51% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 18% growth forecast for the broader market.

With this information, we can see why Kaori Heat Treatment is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Kaori Heat Treatment's P/E?

A significant share price dive has done very little to deflate Kaori Heat Treatment's very lofty P/E. 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 Kaori Heat Treatment maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Kaori Heat Treatment that you should be aware of.

Of course, you might also be able to find a better stock than Kaori Heat Treatment. 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.