There's Reason For Concern Over Hoden Seimitsu Kako Kenkyusho Co., Ltd.'s (TSE:6469) Massive 25% Price Jump

The Hoden Seimitsu Kako Kenkyusho Co., Ltd. (TSE:6469) share price has done very well over the last month, posting an excellent gain of 25%. The annual gain comes to 107% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Hoden Seimitsu Kako Kenkyusho's price-to-earnings (or "P/E") ratio of 31x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Recent times have been advantageous for Hoden Seimitsu Kako Kenkyusho as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hoden Seimitsu Kako Kenkyusho

Want the full picture on analyst estimates for the company? Then our free report on Hoden Seimitsu Kako Kenkyusho will help you uncover what's on the horizon.

Is There Enough Growth For Hoden Seimitsu Kako Kenkyusho?

The only time you'd be truly comfortable seeing a P/E as steep as Hoden Seimitsu Kako Kenkyusho's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 123% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 53% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 3.9% per year over the next three years. That's shaping up to be materially lower than the 8.9% per annum growth forecast for the broader market.

With this information, we find it concerning that Hoden Seimitsu Kako Kenkyusho is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Hoden Seimitsu Kako Kenkyusho's P/E

The strong share price surge has got Hoden Seimitsu Kako Kenkyusho's P/E rushing to great heights as well. 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.

Our examination of Hoden Seimitsu Kako Kenkyusho's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Hoden Seimitsu Kako Kenkyusho that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.