Earnings Tell The Story For TerraSky Co.,Ltd. (TSE:3915) As Its Stock Soars 26%

TerraSky Co.,Ltd. (TSE:3915) shareholders have had their patience rewarded with a 26% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 18% is also fairly reasonable.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider TerraSkyLtd as a stock to avoid entirely with its 72x 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.

Recent times have been advantageous for TerraSkyLtd as its earnings have been rising faster than most other companies. 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.

View our latest analysis for TerraSkyLtd

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

How Is TerraSkyLtd's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. As a result, it also grew EPS by 13% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 38% per year over the next three years. With the market only predicted to deliver 9.4% each year, the company is positioned for a stronger earnings result.

With this information, we can see why TerraSkyLtd 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 Bottom Line On TerraSkyLtd's P/E

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

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for TerraSkyLtd with six simple checks will allow you to discover any risks that could be an issue.

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