Shareholders Should Be Pleased With Penta-Ocean Construction Co., Ltd.'s (TSE:1893) Price

Penta-Ocean Construction Co., Ltd.'s (TSE:1893) price-to-earnings (or "P/E") ratio of 20.9x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x 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 as high as it is.

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While the market has experienced earnings growth lately, Penta-Ocean Construction's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Penta-Ocean Construction

Keen to find out how analysts think Penta-Ocean Construction's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Penta-Ocean Construction's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Penta-Ocean Construction's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 55% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 26% each year as estimated by the six analysts watching the company. With the market only predicted to deliver 9.5% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Penta-Ocean Construction is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Penta-Ocean Construction's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Penta-Ocean Construction 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.

Plus, you should also learn about these 3 warning signs we've spotted with Penta-Ocean Construction (including 1 which is a bit unpleasant).

Of course, you might also be able to find a better stock than Penta-Ocean Construction. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.