Market Participants Recognise Ubicom Holdings, Inc.'s (TSE:3937) Earnings Pushing Shares 40% Higher

Ubicom Holdings, Inc. (TSE:3937) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 2.5% isn't as impressive.

After such a large jump in price, Ubicom Holdings' price-to-earnings (or "P/E") ratio of 27.5x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. 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.

With earnings growth that's superior to most other companies of late, Ubicom Holdings 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.

Check out our latest analysis for Ubicom Holdings

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

Does Growth Match The High P/E?

Ubicom Holdings' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Still, incredibly EPS has fallen 10.0% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 26% each year as estimated by the sole analyst watching the company. With the market only predicted to deliver 9.4% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Ubicom Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Ubicom Holdings' P/E rushing to great heights as well. 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.

As we suspected, our examination of Ubicom Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Ubicom Holdings that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.