Earnings Tell The Story For AsiaQuest Co., Ltd. (TSE:4261) As Its Stock Soars 43%

AsiaQuest Co., Ltd. (TSE:4261) shareholders have had their patience rewarded with a 43% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 96%.

Since its price has surged higher, AsiaQuest may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 21.3x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 10x 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.

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Earnings have risen firmly for AsiaQuest recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for AsiaQuest

Although there are no analyst estimates available for AsiaQuest, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 46% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.3% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that AsiaQuest's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Final Word

Shares in AsiaQuest 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.

As we suspected, our examination of AsiaQuest revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 3 warning signs for AsiaQuest (2 are a bit concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on AsiaQuest, 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.