Pinning Down Sohgo Security Services Co.,Ltd.'s (TSE:2331) P/E Is Difficult Right Now

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Sohgo Security Services Co.,Ltd. (TSE:2331) as a stock to potentially avoid with its 18.2x 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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Sohgo Security ServicesLtd could be doing better as it's been growing earnings less than most other companies lately. 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.

View our latest analysis for Sohgo Security ServicesLtd

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

Is There Enough Growth For Sohgo Security ServicesLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Sohgo Security ServicesLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 4.6%. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 6.8% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 8.6% per year, which is not materially different.

With this information, we find it interesting that Sohgo Security ServicesLtd 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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

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 Sohgo Security ServicesLtd'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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Sohgo Security ServicesLtd with six simple checks on some of these key factors.

You might be able to find a better investment than Sohgo Security ServicesLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.