Risks To Shareholder Returns Are Elevated At These Prices For SECOM CO., LTD. (TSE:9735)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider SECOM CO., LTD. (TSE:9735) as a stock to avoid entirely with its 21.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, SECOM has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for SECOM

Want the full picture on analyst estimates for the company? Then our free report on SECOM will help you uncover what's on the horizon.

Is There Enough Growth For SECOM?

The only time you'd be truly comfortable seeing a P/E as steep as SECOM's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.1% last year. The solid recent performance means it was also able to grow EPS by 20% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 4.1% each year during the coming three years according to the six analysts following the company. That's shaping up to be materially lower than the 9.6% per year growth forecast for the broader market.

With this information, we find it concerning that SECOM is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 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 SECOM's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very 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 SECOM with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than SECOM. 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.