There's Reason For Concern Over OpenWork Inc.'s (TSE:5139) Massive 25% Price Jump

Explore OpenWork's Fair Values from the Community and select yours

OpenWork Inc. (TSE:5139) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The annual gain comes to 131% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, OpenWork may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 35.6x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Earnings have risen firmly for OpenWork recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for OpenWork

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on OpenWork will help you shine a light on its historical performance.

Is There Enough Growth For OpenWork?

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

If we review the last year of earnings growth, the company posted a terrific increase of 23%. However, this wasn't enough as the latest three year period has seen a very unpleasant 29% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's an unpleasant look.

In light of this, it's alarming that OpenWork's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Shares in OpenWork have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that OpenWork currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for OpenWork you should be aware of.

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