Some Confidence Is Lacking In Shoei Co., Ltd.'s (TSE:7839) P/E

With a median price-to-earnings (or "P/E") ratio of close to 15x in Japan, you could be forgiven for feeling indifferent about Shoei Co., Ltd.'s (TSE:7839) P/E ratio of 16.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Shoei as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Shoei

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

Does Growth Match The P/E?

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

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 107% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 5.5% each year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10% per year, which is noticeably more attractive.

With this information, we find it interesting that Shoei is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Shoei's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Shoei is showing 1 warning sign in our investment analysis, you should know about.

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