AeroEdge Co., Ltd. (TSE:7409) Stocks Shoot Up 27% But Its P/E Still Looks Reasonable

AeroEdge Co., Ltd. (TSE:7409) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 272% in the last year.

After such a large jump in price, AeroEdge may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 36.2x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x 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.

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Earnings have risen at a steady rate over the last year for AeroEdge, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for AeroEdge

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on AeroEdge's earnings, revenue and cash flow.

Is There Enough Growth For AeroEdge?

AeroEdge's 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.

Retrospectively, the last year delivered a decent 4.4% gain to the company's bottom line. The latest three year period has also seen an excellent 8,999% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.8% over the next year, materially lower than the company's recent medium-term annualised growth rates.

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

The Key Takeaway

AeroEdge's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that AeroEdge maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, 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 3 warning signs for AeroEdge (2 don't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of AeroEdge's 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.