Investors Appear Satisfied With SAKURA Internet Inc.'s (TSE:3778) Prospects As Shares Rocket 26%

SAKURA Internet Inc. (TSE:3778) shares have had a really impressive month, gaining 26% 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 12% over that time.

After such a large jump in price, SAKURA Internet may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 57.5x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. 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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With earnings growth that's superior to most other companies of late, SAKURA Internet has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for SAKURA Internet

If you'd like to see what analysts are forecasting going forward, you should check out our free report on SAKURA Internet.

How Is SAKURA Internet's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as SAKURA Internet's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 312% gain to the company's bottom line. Pleasingly, EPS has also lifted 874% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 23% each year over the next three years. That's shaping up to be materially higher than the 8.5% per annum growth forecast for the broader market.

With this information, we can see why SAKURA Internet 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.

What We Can Learn From SAKURA Internet's P/E?

SAKURA Internet's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that SAKURA Internet maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for SAKURA Internet 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.