Cybozu, Inc. (TSE:4776) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

Cybozu, Inc. (TSE:4776) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 78%.

Since its price has surged higher, Cybozu's price-to-earnings (or "P/E") ratio of 37.6x 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 12x and even P/E's below 9x 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.

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

With earnings growth that's superior to most other companies of late, Cybozu 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.

View our latest analysis for Cybozu

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

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 Cybozu's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 43%. The latest three year period has also seen an excellent 541% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 24% each year over the next three years. That's shaping up to be materially higher than the 9.8% per annum growth forecast for the broader market.

In light of this, it's understandable that Cybozu's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

The strong share price surge has got Cybozu's P/E rushing to great heights as well. 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.

As we suspected, our examination of Cybozu'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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Cybozu that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.