Sinfonia Technology Co.,Ltd.'s (TSE:6507) P/E Still Appears To Be Reasonable

Sinfonia Technology Co.,Ltd.'s (TSE:6507) price-to-earnings (or "P/E") ratio of 18.2x 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 13x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Sinfonia TechnologyLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Sinfonia TechnologyLtd

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Sinfonia TechnologyLtd's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 51% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 124% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the two analysts following the company. That's shaping up to be materially higher than the 9.3% per annum growth forecast for the broader market.

With this information, we can see why Sinfonia TechnologyLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Sinfonia TechnologyLtd's P/E

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.

We've established that Sinfonia TechnologyLtd 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.

Before you settle on your opinion, we've discovered 1 warning sign for Sinfonia TechnologyLtd that you should be aware of.

You might be able to find a better investment than Sinfonia TechnologyLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.