Subdued Growth No Barrier To OPTiM Corporation (TSE:3694) With Shares Advancing 26%

OPTiM Corporation (TSE:3694) shares have continued their recent momentum with a 26% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

After such a large jump in price, OPTiM may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 51.3x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's superior to most other companies of late, OPTiM has been doing relatively well. 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.

Check out our latest analysis for OPTiM

Want the full picture on analyst estimates for the company? Then our free report on OPTiM will help you uncover what's on the horizon.

How Is OPTiM's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 40% last year. The strong recent performance means it was also able to grow EPS by 61% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 9.1% over the next year. That's shaping up to be similar to the 11% growth forecast for the broader market.

With this information, we find it interesting that OPTiM is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On OPTiM's P/E

OPTiM's P/E is flying high just like its stock has during the last month. 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.

Our examination of OPTiM's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for OPTiM you should know about.

Of course, you might also be able to find a better stock than OPTiM. 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.