SWCC Corporation's (TSE:5805) 29% Share Price Surge Not Quite Adding Up

Despite an already strong run, SWCC Corporation (TSE:5805) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 185% in the last year.

After such a large jump in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider SWCC as a stock to avoid entirely with its 20.7x 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 so lofty.

SWCC certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for SWCC

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as SWCC's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. Pleasingly, EPS has also lifted 70% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 9.9% each year during the coming three years according to the four analysts following the company. With the market predicted to deliver 10% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that SWCC is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

SWCC's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of SWCC's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for SWCC that you should be aware of.

You might be able to find a better investment than SWCC. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.