AsiaQuest Co., Ltd.'s (TSE:4261) P/E Is Still On The Mark Following 40% Share Price Bounce

AsiaQuest Co., Ltd. (TSE:4261) shares have continued their recent momentum with a 40% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 49%.

Since its price has surged higher, AsiaQuest's price-to-earnings (or "P/E") ratio of 26.7x 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 14x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, AsiaQuest's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for AsiaQuest

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on AsiaQuest will help you shine a light on its historical performance.

Is There Enough Growth For AsiaQuest?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 154% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Comparing that to the market, which is only predicted to deliver 11% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why AsiaQuest is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From AsiaQuest's P/E?

Shares in AsiaQuest have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that AsiaQuest maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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. If recent medium-term earnings trends continue, 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 and we've discovered 3 warning signs for AsiaQuest (2 are significant!) that you should be aware of before investing here.

You might be able to find a better investment than AsiaQuest. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.