Kaori Heat Treatment Co., Ltd.'s (TWSE:8996) Earnings Haven't Escaped The Attention Of Investors

When close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 21x, you may consider Kaori Heat Treatment Co., Ltd. (TWSE:8996) as a stock to avoid entirely with its 55x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's inferior to most other companies of late, Kaori Heat Treatment has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Kaori Heat Treatment

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Kaori Heat Treatment.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Kaori Heat Treatment would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Although pleasingly EPS has lifted 396% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 46% each year as estimated by the four analysts watching the company. With the market only predicted to deliver 16% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Kaori Heat Treatment's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Kaori Heat Treatment's P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Kaori Heat Treatment's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Kaori Heat Treatment, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.