Investors Appear Satisfied With Fixstars Corporation's (TSE:3687) Prospects As Shares Rocket 36%

Those holding Fixstars Corporation (TSE:3687) shares would be relieved that the share price has rebounded 36% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.5% in the last twelve months.

Since its price has surged higher, Fixstars' price-to-earnings (or "P/E") ratio of 35.2x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Fixstars' earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Is There Enough Growth For Fixstars?

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

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 159% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 19% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.8% per year, which is noticeably less attractive.

In light of this, it's understandable that Fixstars' 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.

The Bottom Line On Fixstars' P/E

Shares in Fixstars have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of Fixstars' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

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

Of course, you might also be able to find a better stock than Fixstars. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.