Wakita & Co.,LTD.'s (TSE:8125) Shareholders Might Be Looking For Exit

Wakita & Co.,LTD.'s (TSE:8125) price-to-earnings (or "P/E") ratio of 19.7x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x and even P/E's below 8x are quite common. 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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WakitaLTD has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for WakitaLTD

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on WakitaLTD's earnings, revenue and cash flow.

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

WakitaLTD'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.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 14% last year. The latest three year period has also seen an excellent 38% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

It's interesting to note that the rest of the market is similarly expected to grow by 10% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

In light of this, it's curious that WakitaLTD's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

What We Can Learn From WakitaLTD's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that WakitaLTD currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve, it's 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 WakitaLTD with six simple checks will allow you to discover any risks that could be an issue.

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