SAMCO Inc.'s (TSE:6387) 25% Jump Shows Its Popularity With Investors

SAMCO Inc. (TSE:6387) shareholders have had their patience rewarded with a 25% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 5.6% isn't as impressive.

Since its price has surged higher, SAMCO's price-to-earnings (or "P/E") ratio of 17.4x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

Recent times have been advantageous for SAMCO as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for SAMCO

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

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

In order to justify its P/E ratio, SAMCO would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 15% gain to the company's bottom line. Pleasingly, EPS has also lifted 61% 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 one analyst covering the company suggest earnings should grow by 18% over the next year. With the market only predicted to deliver 11%, the company is positioned for a stronger earnings result.

With this information, we can see why SAMCO 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.

The Key Takeaway

SAMCO shares have received a push in the right direction, but its P/E is elevated too. 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 SAMCO 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for SAMCO that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.