BANDAI NAMCO Holdings Inc.'s (TSE:7832) Share Price Not Quite Adding Up

BANDAI NAMCO Holdings Inc.'s (TSE:7832) price-to-earnings (or "P/E") ratio of 19.4x might make it look like a 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

We've discovered 2 warning signs about BANDAI NAMCO Holdings. View them for free.

BANDAI NAMCO Holdings 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.

Check out our latest analysis for BANDAI NAMCO Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on BANDAI NAMCO Holdings.

How Is BANDAI NAMCO Holdings' Growth Trending?

In order to justify its P/E ratio, BANDAI NAMCO Holdings would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 158% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 185% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 3.8% each year as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 9.8% each year.

With this information, we find it concerning that BANDAI NAMCO Holdings is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

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 BANDAI NAMCO Holdings' analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a poor outlook with earnings heading backwards, 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for BANDAI NAMCO Holdings (1 is concerning!) that you need to be mindful of.

Of course, you might also be able to find a better stock than BANDAI NAMCO Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.