What You Can Learn From Kaori Heat Treatment Co., Ltd.'s (TWSE:8996) P/E After Its 28% Share Price Crash

Kaori Heat Treatment Co., Ltd. (TWSE:8996) shares have had a horrible month, losing 28% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Even after such a large drop in price, Kaori Heat Treatment may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 53.6x, since almost half of all companies in Taiwan have P/E ratios under 22x and even P/E's lower than 15x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Kaori Heat Treatment has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Kaori Heat Treatment

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How Is Kaori Heat Treatment's Growth Trending?

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 the company grew earnings per share by an impressive 52% last year. Pleasingly, EPS has also lifted 665% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 41% per year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 13% per year, which is noticeably less attractive.

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.

The Bottom Line On 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. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

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. 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.

Having said that, be aware Kaori Heat Treatment is showing 1 warning sign in our investment analysis, you should know about.

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.

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