Investors Appear Satisfied With Penta-Ocean Construction Co., Ltd.'s (TSE:1893) Prospects As Shares Rocket 28%

Despite an already strong run, Penta-Ocean Construction Co., Ltd. (TSE:1893) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 126% in the last year.

Since its price has surged higher, Penta-Ocean Construction's price-to-earnings (or "P/E") ratio of 27.6x 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Penta-Ocean Construction could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Penta-Ocean Construction

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Penta-Ocean Construction.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Penta-Ocean Construction would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 22%. Still, the latest three year period has seen an excellent 55% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 34% per year during the coming three years according to the six analysts following the company. That's shaping up to be materially higher than the 9.6% per year growth forecast for the broader market.

With this information, we can see why Penta-Ocean Construction is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Penta-Ocean Construction's P/E

Shares in Penta-Ocean Construction have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Penta-Ocean Construction's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Penta-Ocean Construction (1 doesn't sit too well with us!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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.