Why Investors Shouldn't Be Surprised By VRAIN Solution, Inc.'s (TSE:135A) 27% Share Price Surge

VRAIN Solution, Inc. (TSE:135A) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 39% over that time.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider VRAIN Solution as a stock to avoid entirely with its 58.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Our free stock report includes 2 warning signs investors should be aware of before investing in VRAIN Solution. Read for free now.

Earnings have risen firmly for VRAIN Solution recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for VRAIN Solution

Although there are no analyst estimates available for VRAIN Solution, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For VRAIN Solution?

There's an inherent assumption that a company should far outperform the market for P/E ratios like VRAIN Solution's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. The latest three year period has also seen an excellent 3,619% overall rise in EPS, aided by its short-term performance. 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 9.8% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that VRAIN Solution's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Bottom Line On VRAIN Solution's P/E

The strong share price surge has got VRAIN Solution's P/E rushing to great heights as well. 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 VRAIN Solution maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with VRAIN Solution, and understanding these should be part of your investment process.

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.