Mitsubishi Electric Corporation (TSE:6503) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 20x Mitsubishi Electric Corporation (TSE:6503) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. 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, Mitsubishi Electric has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Mitsubishi Electric

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

In order to justify its P/E ratio, Mitsubishi Electric 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 34% last year. Pleasingly, EPS has also lifted 116% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 6.1% per year as estimated by the analysts watching the company. With the market predicted to deliver 9.5% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Mitsubishi Electric's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Mitsubishi Electric's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Mitsubishi Electric with six simple checks will allow you to discover any risks that could be an issue.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.