Hikari Tsushin, Inc.'s (TSE:9435) Share Price Could Signal Some Risk

With a median price-to-earnings (or "P/E") ratio of close to 12x in Japan, you could be forgiven for feeling indifferent about Hikari Tsushin, Inc.'s (TSE:9435) P/E ratio of 10.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Hikari Tsushin certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Hikari Tsushin

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

Is There Some Growth For Hikari Tsushin?

In order to justify its P/E ratio, Hikari Tsushin would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 55% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 126% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings growth is heading into negative territory, declining 6.1% per year over the next three years. That's not great when the rest of the market is expected to grow by 9.7% per year.

In light of this, it's somewhat alarming that Hikari Tsushin's P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 negative growth outlook.

The Final Word

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.

Our examination of Hikari Tsushin's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more 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 Hikari Tsushin is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Hikari Tsushin. 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.