Mitsubishi Heavy Industries, Ltd.'s (TSE:7011) 35% Jump Shows Its Popularity With Investors

Mitsubishi Heavy Industries, Ltd. (TSE:7011) shares have had a really impressive month, gaining 35% after a shaky period beforehand. The annual gain comes to 110% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Mitsubishi Heavy Industries' price-to-earnings (or "P/E") ratio of 36.6x 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 12x and even P/E's below 9x are quite common. 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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With earnings growth that's superior to most other companies of late, Mitsubishi Heavy Industries has been doing relatively well. 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.

See our latest analysis for Mitsubishi Heavy Industries

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mitsubishi Heavy Industries.

Is There Enough Growth For Mitsubishi Heavy Industries?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Mitsubishi Heavy Industries' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 27%. The strong recent performance means it was also able to grow EPS by 193% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 15% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.8% each year, which is noticeably less attractive.

With this information, we can see why Mitsubishi Heavy Industries is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Mitsubishi Heavy Industries' P/E?

Shares in Mitsubishi Heavy Industries 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.

We've established that Mitsubishi Heavy Industries maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. 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 1 warning sign for Mitsubishi Heavy Industries that you need to be mindful of.

If you're unsure about the strength of Mitsubishi Heavy Industries' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.