Aisin Corporation's (TSE:7259) Price In Tune With Earnings

Aisin Corporation's (TSE:7259) price-to-earnings (or "P/E") ratio of 46.6x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. 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.

While the market has experienced earnings growth lately, Aisin's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Aisin

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Aisin.

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 84% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 100% per annum as estimated by the analysts watching the company. With the market only predicted to deliver 11% per year, the company is positioned for a stronger earnings result.

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

The Bottom Line On Aisin's 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.

We've established that Aisin maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Aisin you should know about.

You might be able to find a better investment than Aisin. 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.