Why Investors Shouldn't Be Surprised By Sakura Development Co.,Ltd's (TWSE:2539) 27% Share Price Surge

Sakura Development Co.,Ltd (TWSE:2539) shares have continued their recent momentum with a 27% gain in the last month alone. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Sakura DevelopmentLtd's price-to-earnings (or "P/E") ratio of 23.5x might make it look like a sell right now compared to the market in Taiwan, where around half of the companies have P/E ratios below 20x and even P/E's below 14x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been quite advantageous for Sakura DevelopmentLtd 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.

View our latest analysis for Sakura DevelopmentLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sakura DevelopmentLtd will help you shine a light on its historical performance.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Sakura DevelopmentLtd would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 48% last year. The latest three year period has also seen an excellent 269% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 20% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Sakura DevelopmentLtd'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 Sakura DevelopmentLtd's P/E?

The large bounce in Sakura DevelopmentLtd's shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Sakura DevelopmentLtd 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Sakura DevelopmentLtd that you need to be mindful of.

You might be able to find a better investment than Sakura DevelopmentLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.