Despite an already strong run, Good Life Company,Inc. (TSE:2970) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 127% in the last year.
In spite of the firm bounce in price, it's still not a stretch to say that Good Life CompanyInc's price-to-earnings (or "P/E") ratio of 14.1x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 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.
Good Life CompanyInc certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for Good Life CompanyInc
What Are Growth Metrics Telling Us About The P/E?
In order to justify its P/E ratio, Good Life CompanyInc would need to produce growth that's similar to the market.
If we review the last year of earnings growth, the company posted a terrific increase of 59%. Pleasingly, EPS has also lifted 1,637% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we find it interesting that Good Life CompanyInc is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
Its shares have lifted substantially and now Good Life CompanyInc's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Good Life CompanyInc currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
You always need to take note of risks, for example - Good Life CompanyInc has 2 warning signs we think you should be aware of.
You might be able to find a better investment than Good Life CompanyInc. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.