Market Participants Recognise GreenEnergy & Company's (TSE:1436) Earnings Pushing Shares 35% Higher

Despite an already strong run, GreenEnergy & Company (TSE:1436) shares have been powering on, with a gain of 35% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider GreenEnergy as a stock to avoid entirely with its 22x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been quite advantageous for GreenEnergy as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for GreenEnergy

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

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

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

Retrospectively, the last year delivered an exceptional 30% 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. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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.

With this information, we can see why GreenEnergy is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

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

The strong share price surge has got GreenEnergy'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 GreenEnergy 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. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - GreenEnergy has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.