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華爾街日報After Leaping 26% Otani Kogyo Co.,Ltd. (TSE:5939) Shares Are Not Flying Under The Radar
Otani Kogyo Co.,Ltd. (TSE:5939) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 7.6% isn't as attractive.
Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Otani KogyoLtd as a stock to potentially avoid with its 17.9x P/E ratio. 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.
As an illustration, earnings have deteriorated at Otani KogyoLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
View our latest analysis for Otani KogyoLtd
How Is Otani KogyoLtd's Growth Trending?
In order to justify its P/E ratio, Otani KogyoLtd would need to produce impressive growth in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 33%. Even so, admirably EPS has lifted 101% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.8% shows it's noticeably more attractive on an annualised basis.
With this information, we can see why Otani KogyoLtd is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
The Bottom Line On Otani KogyoLtd's P/E
The large bounce in Otani KogyoLtd's shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Otani KogyoLtd maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Otani KogyoLtd that you need to be mindful of.
Of course, you might also be able to find a better stock than Otani KogyoLtd. 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.