BroadBand Security, Inc.'s (TSE:4398) P/E Is Still On The Mark Following 27% Share Price Bounce

Despite an already strong run, BroadBand Security, Inc. (TSE:4398) shares have been powering on, with a gain of 27% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

Following the firm bounce in price, BroadBand Security may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.1x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

As an illustration, earnings have deteriorated at BroadBand Security over the last year, which is not ideal at all. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for BroadBand Security

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on BroadBand Security's earnings, revenue and cash flow.

How Is BroadBand Security's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 7.9%. Still, the latest three year period has seen an excellent 48% overall rise in EPS, in spite of its unsatisfying short-term performance. 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.

This is in contrast to the rest of the market, which is expected to grow by 11% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that BroadBand Security's P/E sits above the majority of other companies. 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 BroadBand Security's P/E?

The large bounce in BroadBand Security's shares has lifted the company's P/E to a fairly high level. 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.

As we suspected, our examination of BroadBand Security revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for BroadBand Security that you should be aware of.

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