Optimistic Investors Push Sakura Development Co.,Ltd (TWSE:2539) Shares Up 28% But Growth Is Lacking

The Sakura Development Co.,Ltd (TWSE:2539) share price has done very well over the last month, posting an excellent gain of 28%. The annual gain comes to 107% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in Taiwan have price-to-earnings ratios (or "P/E's") below 21x, you may consider Sakura DevelopmentLtd as a stock to avoid entirely with its 52.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Sakura DevelopmentLtd over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Sakura DevelopmentLtd

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

How Is Sakura DevelopmentLtd's Growth Trending?

Sakura DevelopmentLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 25% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 22% shows it's an unpleasant look.

With this information, we find it concerning that Sakura DevelopmentLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Sakura DevelopmentLtd's P/E?

The strong share price surge has got Sakura DevelopmentLtd's P/E rushing to great heights as well. 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 Sakura DevelopmentLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Sakura DevelopmentLtd you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.