Why Investors Shouldn't Be Surprised By Mitsubishi Heavy Industries, Ltd.'s (TSE:7011) 29% Share Price Surge

Despite an already strong run, Mitsubishi Heavy Industries, Ltd. (TSE:7011) shares have been powering on, with a gain of 29% in the last thirty days. The last month tops off a massive increase of 141% in the last year.

Since its price has surged higher, Mitsubishi Heavy Industries may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.1x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, Mitsubishi Heavy Industries has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Mitsubishi Heavy Industries

Keen to find out how analysts think Mitsubishi Heavy Industries' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Mitsubishi Heavy Industries' Growth Trending?

In order to justify its P/E ratio, Mitsubishi Heavy Industries would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 55% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 16% each year over the next three years. With the market only predicted to deliver 9.9% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Mitsubishi Heavy Industries' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Mitsubishi Heavy Industries' P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. 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.

Of course, you might also be able to find a better stock than Mitsubishi Heavy Industries. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.