Vertex Corporation's (TSE:5290) Shares Climb 27% But Its Business Is Yet to Catch Up

Vertex Corporation (TSE:5290) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 62%.

Although its price has surged higher, there still wouldn't be many who think Vertex's price-to-earnings (or "P/E") ratio of 15.3x is worth a mention when the median P/E in Japan is similar at about 14x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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With earnings growth that's superior to most other companies of late, Vertex has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Vertex

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Vertex.

Is There Some Growth For Vertex?

There's an inherent assumption that a company should be matching the market for P/E ratios like Vertex's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 33%. EPS has also lifted 20% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings growth is heading into negative territory, declining 6.1% over the next year. That's not great when the rest of the market is expected to grow by 8.5%.

In light of this, it's somewhat alarming that Vertex's P/E sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

What We Can Learn From Vertex's P/E?

Vertex appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

We've established that Vertex currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Vertex that you need to take into consideration.

If you're unsure about the strength of Vertex'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.