Investors Appear Satisfied With SHIFT Inc.'s (TSE:3697) Prospects As Shares Rocket 26%

SHIFT Inc. (TSE:3697) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.

After such a large jump in price, SHIFT may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 54.5x, since almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

We've discovered 1 warning sign about SHIFT. View them for free.

While the market has experienced earnings growth lately, SHIFT's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for SHIFT

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

How Is SHIFT's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.4%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 51% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 32% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.7% each year, which is noticeably less attractive.

With this information, we can see why SHIFT is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

SHIFT's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that SHIFT maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Before you settle on your opinion, we've discovered 1 warning sign for SHIFT that you should be aware of.

You might be able to find a better investment than SHIFT. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.