After Leaping 29% Onto Innovation Inc. (NYSE:ONTO) Shares Are Not Flying Under The Radar

The Onto Innovation Inc. (NYSE:ONTO) share price has done very well over the last month, posting an excellent gain of 29%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 35% over that time.

After such a large jump in price, Onto Innovation may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 33.6x, since almost half of all companies in the United States have P/E ratios under 19x and even P/E's lower than 11x are not unusual. 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.

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Onto Innovation certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

See our latest analysis for Onto Innovation

Keen to find out how analysts think Onto Innovation's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Onto Innovation?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. As a result, it also grew EPS by 7.2% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 21% per year over the next three years. With the market only predicted to deliver 11% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Onto Innovation 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 Key Takeaway

Shares in Onto Innovation have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Onto Innovation'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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Onto Innovation with six simple checks.

If you're unsure about the strength of Onto Innovation's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.