Potential Upside For Sekisui House, Ltd. (TSE:1928) Not Without Risk

Sekisui House, Ltd.'s (TSE:1928) price-to-earnings (or "P/E") ratio of 10.8x might make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 23x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Sekisui House certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Sekisui House

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

Does Growth Match 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 growth, the company posted a terrific increase of 27%. The strong recent performance means it was also able to grow EPS by 72% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 7.9% per year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.6% per annum, which is not materially different.

With this information, we find it odd that Sekisui House is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Bottom Line On Sekisui House's P/E

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.

We've established that Sekisui House currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

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 P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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