When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Shimano Inc. (TSE:7309) as a stock to avoid entirely with its 35.9x P/E ratio. 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.
While the market has experienced earnings growth lately, Shimano's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Shimano
Does Growth Match The High P/E?
In order to justify its P/E ratio, Shimano would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 46%. As a result, earnings from three years ago have also fallen 7.4% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 9.1% per year growth forecast for the broader market.
In light of this, it's understandable that Shimano'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 Shimano'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.
As we suspected, our examination of Shimano'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.
Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Shimano with six simple checks will allow you to discover any risks that could be an issue.
If you're unsure about the strength of Shimano's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.
About TSE:7309
Shimano
Develops, produces, and distributes bicycle components, fishing tackles, and rowing equipment.
Flawless balance sheet average dividend payer.
