Why Investors Shouldn't Be Surprised By Mitsubishi Heavy Industries, Ltd.'s (TSE:7011) 26% Share Price Surge

Mitsubishi Heavy Industries, Ltd. (TSE:7011) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Mitsubishi Heavy Industries may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 28.3x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. 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.

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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View 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.

Does Growth Match The High P/E?

Mitsubishi Heavy Industries' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 40%. The strong recent performance means it was also able to grow EPS by 108% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 16% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.4% per year growth forecast for the broader market.

With this information, we can see why Mitsubishi Heavy Industries 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 Mitsubishi Heavy Industries' P/E

The strong share price surge has got Mitsubishi Heavy Industries' P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Mitsubishi Heavy Industries' 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.

It is also worth noting that we have found 1 warning sign for Mitsubishi Heavy Industries that you need to take into consideration.

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.