Earnings Tell The Story For Sumasapo Inc. (TSE:9342) As Its Stock Soars 25%

Sumasapo Inc. (TSE:9342) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 9.5% isn't as attractive.

Since its price has surged higher, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Sumasapo as a stock to potentially avoid with its 20.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Sumasapo has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Sumasapo

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Sumasapo's earnings, revenue and cash flow.

How Is Sumasapo's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Sumasapo's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 23% last year. The latest three year period has also seen an excellent 62% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 8.8% shows it's noticeably more attractive on an annualised basis.

With this information, we can see why Sumasapo is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

The large bounce in Sumasapo's shares has lifted the company's P/E to a fairly high level. 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 Sumasapo maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Sumasapo (1 is a bit concerning!) that you need to take into consideration.

If you're unsure about the strength of Sumasapo'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.