Square Enix Holdings Co., Ltd.'s (TSE:9684) 27% Jump Shows Its Popularity With Investors

Square Enix Holdings Co., Ltd. (TSE:9684) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Since its price has surged higher, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Square Enix Holdings as a stock to avoid entirely with its 78.2x P/E ratio. 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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While the market has experienced earnings growth lately, Square Enix Holdings' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Square Enix Holdings

Want the full picture on analyst estimates for the company? Then our free report on Square Enix Holdings will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Square Enix Holdings would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. As a result, earnings from three years ago have also fallen 74% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 43% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 9.8% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Square Enix Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Shares in Square Enix Holdings have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Square Enix Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Square Enix Holdings that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.