Skylark Holdings Co., Ltd.’s (TSE:3197) Business Is Trailing The Market But Its Shares Aren’t

When close to half the companies in Japan have price-to-earnings ratios (or “P/E’s”) below 14x, you may consider Skylark Holdings Co., Ltd. (TSE:3197) as a stock to avoid entirely with its 42.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it’s justified.

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Skylark Holdings certainly has been doing a good job lately as it’s been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Skylark Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 61% gain to the company’s bottom line. Pleasingly, EPS has also lifted 882% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it’s fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 3.1% over the next year. With the market predicted to deliver 9.8% growth , the company is positioned for a weaker earnings result.

In light of this, it’s alarming that Skylark Holdings’ P/E sits above the majority of other companies. 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.

What We Can Learn From Skylark Holdings’ P/E?

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.

Our examination of Skylark Holdings’ analyst forecasts revealed that its inferior earnings outlook isn’t impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren’t likely to support such positive sentiment for long. This places shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Skylark Holdings is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Skylark Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.