Why Investors Shouldn't Be Surprised By Mental Health Technologies Co.,Ltd.'s (TSE:9218) 29% Share Price Surge

Mental Health Technologies Co.,Ltd. (TSE:9218) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, Mental Health TechnologiesLtd's price-to-earnings (or "P/E") ratio of 26.6x 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 10x are quite common. 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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With earnings growth that's superior to most other companies of late, Mental Health TechnologiesLtd 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 Mental Health TechnologiesLtd

Keen to find out how analysts think Mental Health TechnologiesLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Mental Health TechnologiesLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 297% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 13% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 46% per annum as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.6% per year, which is noticeably less attractive.

With this information, we can see why Mental Health TechnologiesLtd 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

Mental Health TechnologiesLtd's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Mental Health TechnologiesLtd's 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. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Mental Health TechnologiesLtd that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.