TerraSky Co.,Ltd. (TSE:3915) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

TerraSky Co.,Ltd. (TSE:3915) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Since its price has surged higher, TerraSkyLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 58.2x, 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. 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, TerraSkyLtd 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.

View our latest analysis for TerraSkyLtd

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How Is TerraSkyLtd's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 69%. The strong recent performance means it was also able to grow EPS by 49% in total over the last three years. 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 sole analyst covering the company suggest earnings should grow by 36% per year over the next three years. That's shaping up to be materially higher than the 11% per annum growth forecast for the broader market.

With this information, we can see why TerraSkyLtd 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 Key Takeaway

TerraSkyLtd'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 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with TerraSkyLtd, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on TerraSkyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.