Sanrio Company, Ltd. (TSE:8136) Stocks Shoot Up 29% But Its P/E Still Looks Reasonable

Sanrio Company, Ltd. (TSE:8136) shares have continued their recent momentum with a 29% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

After such a large jump in price, Sanrio Company may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 38.3x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for Sanrio Company as its earnings have been rising faster than most other companies. 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.

View our latest analysis for Sanrio Company

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

Is There Enough Growth For Sanrio Company?

The only time you'd be truly comfortable seeing a P/E as steep as Sanrio Company's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 89% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the ten analysts watching the company. With the market only predicted to deliver 9.4% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Sanrio Company 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.

What We Can Learn From Sanrio Company's P/E?

Sanrio Company's P/E is flying high just like its stock has during the last month. 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 Sanrio Company maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Sanrio Company with six simple checks.

If you're unsure about the strength of Sanrio Company'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.