Why Investors Shouldn't Be Surprised By Frontier Management Inc.'s (TSE:7038) 25% Share Price Surge

Frontier Management Inc. (TSE:7038) shareholders have had their patience rewarded with a 25% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 64%.

Since its price has surged higher, Frontier Management's price-to-earnings (or "P/E") ratio of 28.3x 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 14x and even P/E's below 9x are quite common. 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.

Recent times have been quite advantageous for Frontier Management as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Frontier Management

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 Frontier Management's earnings, revenue and cash flow.

Is There Enough Growth For Frontier Management?

In order to justify its P/E ratio, Frontier Management would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 39% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 81% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 11% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why Frontier Management is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

Frontier Management's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Frontier Management maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Frontier Management has 3 warning signs (and 1 which shouldn't be ignored) we think you should know about.

If these risks are making you reconsider your opinion on Frontier Management, 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.