Investors Appear Satisfied With BrainPad Inc.'s (TSE:3655) Prospects As Shares Rocket 43%

BrainPad Inc. (TSE:3655) shares have continued their recent momentum with a 43% gain in the last month alone. The annual gain comes to 154% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider BrainPad as a stock to avoid entirely with its 61.6x 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.

BrainPad could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for BrainPad

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

Is There Enough Growth For BrainPad?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.1% last year. EPS has also lifted 18% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 27% per year as estimated by the one analyst watching the company. With the market only predicted to deliver 9.9% per year, the company is positioned for a stronger earnings result.

With this information, we can see why BrainPad is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got BrainPad's P/E rushing to great heights as well. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of BrainPad's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for BrainPad that 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.