What Obayashi Corporation's (TSE:1802) P/E Is Not Telling You

There wouldn't be many who think Obayashi Corporation's (TSE:1802) price-to-earnings (or "P/E") ratio of 14.2x is worth a mention when the median P/E in Japan is similar at about 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Obayashi 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.

Check out our latest analysis for Obayashi

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Is There Some Growth For Obayashi?

The only time you'd be comfortable seeing a P/E like Obayashi's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. EPS has also lifted 6.9% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.4% each year as estimated by the seven analysts watching the company. With the market predicted to deliver 9.3% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that Obayashi's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Obayashi's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Obayashi that you need to take into consideration.

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.