Why Investors Shouldn't Be Surprised By Plus Alpha Consulting Co.,Ltd.'s (TSE:4071) 33% Share Price Surge

Plus Alpha Consulting Co.,Ltd. (TSE:4071) shares have had a really impressive month, gaining 33% 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 30% over that time.

After such a large jump in price, Plus Alpha ConsultingLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 28.3x, 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.

With earnings growth that's superior to most other companies of late, Plus Alpha ConsultingLtd 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 Plus Alpha ConsultingLtd

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

Is There Enough Growth For Plus Alpha ConsultingLtd?

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

If we review the last year of earnings growth, the company posted a terrific increase of 18%. The strong recent performance means it was also able to grow EPS by 94% 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.

Looking ahead now, EPS is anticipated to climb by 28% per annum during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 9.4% each year growth forecast for the broader market.

In light of this, it's understandable that Plus Alpha ConsultingLtd's 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 Final Word

Shares in Plus Alpha ConsultingLtd have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

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

Having said that, be aware Plus Alpha ConsultingLtd is showing 2 warning signs in our investment analysis, you should know about.

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.