MEDIROM Healthcare Technologies Inc. (NASDAQ:MRM) Held Back By Insufficient Growth Even After Shares Climb 29%

MEDIROM Healthcare Technologies Inc. (NASDAQ:MRM) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. But the last month did very little to improve the 60% share price decline over the last year.

Even after such a large jump in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 20x, you may still consider MEDIROM Healthcare Technologies as an attractive investment with its 12.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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The earnings growth achieved at MEDIROM Healthcare Technologies over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for MEDIROM Healthcare Technologies

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on MEDIROM Healthcare Technologies will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as MEDIROM Healthcare Technologies' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. 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 15% 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 MEDIROM Healthcare Technologies is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Despite MEDIROM Healthcare Technologies' shares building up a head of steam, its P/E still lags most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that MEDIROM Healthcare Technologies maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. 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.

Before you settle on your opinion, we've discovered 5 warning signs for MEDIROM Healthcare Technologies (4 make us uncomfortable!) that you should be aware of.

Of course, you might also be able to find a better stock than MEDIROM Healthcare Technologies. 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.