What Marumae Co., Ltd.'s (TSE:6264) 27% Share Price Gain Is Not Telling You

The Marumae Co., Ltd. (TSE:6264) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 41% in the last year.

After such a large jump in price, Marumae's price-to-earnings (or "P/E") ratio of 19.6x might make it look like a 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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With earnings growth that's exceedingly strong of late, Marumae has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Marumae

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Marumae's earnings, revenue and cash flow.

How Is Marumae's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 304%. Still, incredibly EPS has fallen 20% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.8% shows it's an unpleasant look.

In light of this, it's alarming that Marumae's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Marumae's P/E?

The large bounce in Marumae's shares has lifted the company's P/E to a fairly high level. 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 Marumae revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Marumae is showing 4 warning signs in our investment analysis, and 2 of those are a bit unpleasant.

If you're unsure about the strength of Marumae's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.