Why Investors Shouldn't Be Surprised By GMO internet group, Inc.'s (TSE:9449) 25% Share Price Surge

GMO internet group, Inc. (TSE:9449) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

After such a large jump in price, GMO internet group's price-to-earnings (or "P/E") ratio of 26.4x 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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GMO internet group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, 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 GMO internet group

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

Is There Enough Growth For GMO internet group?

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

Retrospectively, the last year delivered a frustrating 5.1% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 18% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 29% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially higher than the 9.8% per annum growth forecast for the broader market.

With this information, we can see why GMO internet group 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

The strong share price surge has got GMO internet group'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 GMO internet group'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. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for GMO internet group with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than GMO internet group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.