Despite an already strong run, Link and Motivation Inc. (TSE:2170) shares have performed strongly over the past 30 days, gaining 26%. Looking back a little further, it’s encouraging to see that the stock is up 35% over the past year.
Given such a large jump in share price and the fact that around half of all Japanese companies have a price-to-earnings (P/E) ratio of less than 13, you may want to avoid Link and Motivation, which has a P/E ratio of 19.9. However, it is not advisable to simply take the P/E ratio at face value, as there may be an explanation for why it is so high.
The recent past has been favorable for Link and Motivation, as their earnings have grown faster than most other companies. The P/E ratio is probably so high because investors expect this strong earnings performance to continue. If not, existing shareholders may be a little nervous about the future viability of the share price.
Check out our latest analysis on link and motivation
If you want to know what analysts are predicting for the future, you should check out our free Report on link and motivation.
Is there enough growth for link and motivation?
A P/E ratio as high as that of Link and Motivation would only be truly comfortable if the company is on track to outperform the market growth.
Looking at earnings growth over the past year, the company has seen a tremendous 45% increase. However, overall earnings per share have barely increased compared to three years ago, which is not ideal. Accordingly, shareholders would probably not have been too happy with the unstable medium-term growth rates.
Looking ahead, the two analysts covering the company expect earnings to grow 14% per year over the next three years, while the rest of the market is forecast to grow at just 9.3% per year, which is much less attractive.
With this in mind, it’s understandable that Link and Motivation’s P/E ratio is higher than most other companies. It seems that most investors expect this strong future growth and are willing to pay more for the stock.
The last word
The sharp rise in Link and Motivation’s shares has pushed the company’s P/E ratio to quite high levels. We would say that the price-to-earnings ratio is not primarily used as a valuation tool, but rather to gauge current investor sentiment and future expectations.
As we suspected, our study of analyst forecasts for Link and Motivation found that its above-average earnings outlook is contributing to its high P/E ratio. For now, shareholders are happy with the P/E ratio as they are fairly confident that future earnings are not at risk. Unless these conditions change, they will continue to provide strong support to the share price.
Before you form an opinion, we found out 1 Warning Sign for Link and Motivation that you should know.
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This Simply Wall St article is of a general nature. We comment solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
