Genky DrugStores Co., Ltd. (TSE:9267) has had a really impressive month, gaining 28% after a shaky period earlier. Looking back a little further, it’s encouraging to see that the stock is up 38% over the past year.
Given such a large price jump, with around half of Japanese companies trading at a price-to-earnings (P/E) ratio of less than 12, Genky DrugStores, with its P/E ratio of 16.5, could be considered a stock to potentially avoid. Still, we would have to dig a little deeper to determine if there is a rational basis for the elevated P/E ratio.
With earnings growth that has been better than most companies recently, Genky DrugStores has done relatively well. It seems that many expect the strong earnings performance to continue, which has increased the P/E ratio. That’s one thing you really hope, otherwise you’re paying a pretty high price for no particular reason.
Check out our latest analysis for Genky DrugStores
If you want to know what analysts are predicting for the future, you should check out our free Report on Genky DrugStores.
Is there enough growth for Genky DrugStores?
There is a fundamental assumption that a company must outperform the market for P/E ratios like Genky DrugStores to be considered reasonable.
First, if we look back, we see that the company managed to grow its earnings per share by an impressive 165% last year. Due to the strong recent performance, the company managed to grow earnings per share by a total of 31% over the last three years. Accordingly, shareholders would likely have welcomed these medium-term earnings growth rates.
Looking ahead, earnings per share are expected to decline, with the three analysts predicting that they will shrink by 16% annually over the next three years. That’s not good considering that the rest of the market is expected to grow by 9.6% per year.
With this in mind, it is alarming that Genky DrugStores’ P/E ratio is higher than most other companies. It seems that many of the company’s investors are rejecting the analysts’ pessimism and are not willing to dump their shares at any price. Only the bravest would assume that these prices are sustainable, as these declining earnings will likely weigh heavily on the share price eventually.
The conclusion on Genky DrugStores’ P/E ratio
The sharp rise in Genky DrugStores shares has pushed the company’s P/E ratio to quite high levels. Normally, we would caution against reading too much into the price-to-earnings ratio when making investment decisions, although it can say a lot about what other market participants think of the company.
We found that Genky DrugStores is currently trading at a much higher P/E than expected for a company whose earnings are expected to decline. At the moment, we are increasingly uncomfortable with the high P/E as the forecast future earnings are most likely not going to support such positive sentiment for long. Unless these conditions improve significantly, it is very difficult to accept these prices as reasonable.
Before you take the next step, you should know about the 1 warning sign for Genky DrugStores that we uncovered.
You may find a better investment than Genky DrugStores. If you want a selection of possible candidates, check out this free List of interesting companies that trade at a low P/E ratio (but have proven that they can grow their earnings).
New: Manage all your stock portfolios in one place
We have that the ultimate portfolio companion for stock investors, and it’s free.
• Connect an unlimited number of portfolios and see your total amount in one currency
• Be notified of new warning signals or risks by email or mobile phone
• Track the fair value of your stocks
Try a demo portfolio for free
Do you have feedback on this article? Are you concerned about the content? Get in touch directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
Do you have feedback on this article? Are you interested in the content? Contact us directly. Alternatively, send an email to [email protected]
