SMS Co., Ltd.'s (TSE:2175) P/E Still Appears To Be Reasonable

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider SMS Co., Ltd. (TSE:2175) as a stock to potentially avoid with its 17.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Recent times haven't been advantageous for SMS as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, 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.

See our latest analysis for SMS

Keen to find out how analysts think SMS' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Fortunately, a few good years before that means that it was still able to grow EPS by 23% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 15% per year over the next three years. That's shaping up to be materially higher than the 9.6% per year growth forecast for the broader market.

With this information, we can see why SMS is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that SMS 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for SMS that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.