Kurita Water Industries Ltd.'s (TSE:6370) Price Is Out Of Tune With Earnings

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Kurita Water Industries Ltd. (TSE:6370) as a stock to potentially avoid with its 16.6x P/E ratio. 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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With earnings growth that's superior to most other companies of late, Kurita Water Industries has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Kurita Water Industries

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

Is There Enough Growth For Kurita Water Industries?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 44% last year. Pleasingly, EPS has also lifted 94% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the six analysts watching the company. With the market predicted to deliver 9.8% growth per year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Kurita Water Industries' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

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.

We've established that Kurita Water Industries currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Kurita Water Industries with six simple checks.

If you're unsure about the strength of Kurita Water Industries' 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.