Earnings Not Telling The Story For Mabuchi Motor Co., Ltd. (TSE:6592)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Mabuchi Motor Co., Ltd. (TSE:6592) as a stock to potentially avoid with its 18.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Mabuchi Motor could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Mabuchi Motor

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

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Likewise, not much has changed from three years ago as earnings have been stuck during that whole time. So it seems apparent to us that the company has struggled to grow earnings meaningfully over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 12% over the next year. That's shaping up to be similar to the 13% growth forecast for the broader market.

With this information, we find it interesting that Mabuchi Motor is trading at a high P/E compared to the market. 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

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Mabuchi Motor's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Mabuchi Motor is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Mabuchi Motor, 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.