Shareholders Should Be Pleased With Mabuchi Motor Co., Ltd.'s (TSE:6592) Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Mabuchi Motor Co., Ltd. (TSE:6592) as a stock to avoid entirely with its 34x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Mabuchi Motor

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

How Is Mabuchi Motor's Growth Trending?

Mabuchi Motor's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 57%. The last three years don't look nice either as the company has shrunk EPS by 31% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 28% each year during the coming three years according to the ten analysts following the company. That's shaping up to be materially higher than the 9.6% each year growth forecast for the broader market.

In light of this, it's understandable that Mabuchi Motor's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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.

We've established that Mabuchi Motor 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Mabuchi Motor that you should be aware of.

Of course, you might also be able to find a better stock than Mabuchi Motor. 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.