Market Participants Recognise M - mart Inc.'s (TSE:4380) Earnings Pushing Shares 27% Higher

M - mart Inc. (TSE:4380) shares have had a really impressive month, gaining 27% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 9.6% in the last twelve months.

After such a large jump in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider M - mart as a stock to potentially avoid with its 17.4x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about M - mart. View them for free.

The recent earnings growth at M - mart would have to be considered satisfactory if not spectacular. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for M - mart

Although there are no analyst estimates available for M - mart, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is M - mart's Growth Trending?

In order to justify its P/E ratio, M - mart would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.5% last year. The latest three year period has also seen an excellent 90% overall rise in EPS, aided somewhat by its short-term performance. 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 9.7% 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 M - mart 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.

What We Can Learn From M - mart's P/E?

M - mart shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of M - mart revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. 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.

Plus, you should also learn about these 2 warning signs we've spotted with M - mart.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.