Smile Holdings Inc.'s (TSE:7084) 26% Jump Shows Its Popularity With Investors

Smile Holdings Inc. (TSE:7084) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 276% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Smile Holdings as a stock to avoid entirely with its 36.3x P/E ratio. 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

With earnings growth that's exceedingly strong of late, Smile Holdings has been doing very well. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Smile Holdings

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

Is There Enough Growth For Smile Holdings?

In order to justify its P/E ratio, Smile Holdings 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 34% last year. Pleasingly, EPS has also lifted 956% in aggregate from three years ago, thanks to the last 12 months of growth. 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 9.1% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Smile Holdings is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

Smile Holdings' 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.

As we suspected, our examination of Smile Holdings 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.

Before you settle on your opinion, we've discovered 4 warning signs for Smile Holdings (2 are potentially serious!) that you should be aware of.

Of course, you might also be able to find a better stock than Smile Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.