With a price-to-earnings (or "P/E") ratio of 10.9x Sekisui House, Ltd. (TSE:1928) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 23x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Sekisui House hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for Sekisui House
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, Sekisui House would need to produce sluggish growth that's trailing the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 16%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 9.9% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 11% per annum over the next three years. That's shaping up to be similar to the 9.4% each year growth forecast for the broader market.
With this information, we find it odd that Sekisui House is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.
The Bottom Line On Sekisui House's P/E
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Sekisui House's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Sekisui House (1 makes us a bit uncomfortable!) that you need to be mindful of.
If these risks are making you reconsider your opinion on Sekisui House, explore our interactive list of high quality stocks to get an idea of what else is out there.
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Discover if Sekisui House might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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