What Tera Probe, Inc.'s (TSE:6627) 28% Share Price Gain Is Not Telling You

Tera Probe, Inc. (TSE:6627) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 175% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Tera Probe as a stock to potentially avoid with its 17.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Tera Probe certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Tera Probe

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

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. Pleasingly, EPS has also lifted 1,620% 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 growth is heading into negative territory, declining 4.2% per year over the next three years. That's not great when the rest of the market is expected to grow by 10% per annum.

With this information, we find it concerning that Tera Probe is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Final Word

Tera Probe shares have received a push in the right direction, but its P/E is elevated too. 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 Tera Probe currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Tera Probe 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.