Obayashi Corporation's (TSE:1802) Earnings Haven't Escaped The Attention Of Investors

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Obayashi Corporation (TSE:1802) as a stock to potentially avoid with its 17.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Obayashi could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 3.4%. This means it has also seen a slide in earnings over the longer-term as EPS is down 24% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.6% per year, which is noticeably less attractive.

In light of this, it's understandable that Obayashi's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Obayashi maintains its high P/E on the strength of its forecast growth being higher than the wider market, 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for Obayashi that we have uncovered.

If these risks are making you reconsider your opinion on Obayashi, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.