Why We're Not Concerned About Japan Elevator Service Holdings Co.,Ltd.'s (TSE:6544) Share Price

Japan Elevator Service Holdings Co.,Ltd.'s (TSE:6544) price-to-earnings (or "P/E") ratio of 67.2x 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 13x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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Japan Elevator Service HoldingsLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is Japan Elevator Service HoldingsLtd's Growth Trending?

In order to justify its P/E ratio, Japan Elevator Service HoldingsLtd would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 22% last year. Pleasingly, EPS has also lifted 102% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 8.9% per annum, which is noticeably less attractive.

In light of this, it's understandable that Japan Elevator Service HoldingsLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Japan Elevator Service HoldingsLtd's P/E

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.

As we suspected, our examination of Japan Elevator Service HoldingsLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

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

If these risks are making you reconsider your opinion on Japan Elevator Service HoldingsLtd, 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.