Why Investors Shouldn't Be Surprised By Mitsubishi Heavy Industries, Ltd.'s (TSE:7011) 27% Share Price Surge

Mitsubishi Heavy Industries, Ltd. (TSE:7011) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The annual gain comes to 176% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Mitsubishi Heavy Industries may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 32.8x, 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. However, the P/E might be quite 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. 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.

See 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 outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 40% last year. 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.

Looking ahead now, EPS is anticipated to climb by 17% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 9.6% per year, the company is positioned for a stronger earnings result.

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 Final Word

Mitsubishi Heavy Industries' P/E is flying high just like its stock has during the last month. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Mitsubishi Heavy Industries that you should be aware of.

If these risks are making you reconsider your opinion on Mitsubishi Heavy Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.