Earnings Tell The Story For Simplex Holdings, Inc. (TSE:4373) As Its Stock Soars 30%

Simplex Holdings, Inc. (TSE:4373) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 40%.

After such a large jump in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Simplex Holdings as a stock to avoid entirely with its 26.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

We've discovered 1 warning sign about Simplex Holdings. View them for free.

Recent times have been advantageous for Simplex Holdings as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Simplex Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Simplex Holdings.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Simplex Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. Pleasingly, EPS has also lifted 65% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 16% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.8% each year, which is noticeably less attractive.

With this information, we can see why Simplex Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Simplex Holdings' P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Simplex Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

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

If you're unsure about the strength of Simplex Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.