Why Investors Shouldn't Be Surprised By Sanrio Company, Ltd.'s (TSE:8136) 40% Share Price Surge

Despite an already strong run, Sanrio Company, Ltd. (TSE:8136) shares have been powering on, with a gain of 40% in the last thirty days. The last month tops off a massive increase of 186% in the last year.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Sanrio Company as a stock to avoid entirely with its 47.5x 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.

With earnings growth that's superior to most other companies of late, Sanrio Company has been doing relatively well. 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.

Check out our latest analysis for Sanrio Company

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

Does Growth Match The High P/E?

Sanrio Company's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 106% gain to the company's bottom line. Pleasingly, EPS has also lifted 2,199% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 12% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.2% per annum, which is noticeably less attractive.

In light of this, it's understandable that Sanrio Company's P/E sits above the majority of other companies. 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?

Shares in Sanrio Company 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 Sanrio Company maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Sanrio Company has 1 warning sign we think you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.