Risks To Shareholder Returns Are Elevated At These Prices For Hagihara Industries Inc. (TSE:7856)

It's not a stretch to say that Hagihara Industries Inc.'s (TSE:7856) price-to-earnings (or "P/E") ratio of 9.8x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 11x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Hagihara Industries' earnings growth of late has been pretty similar to most other companies. The P/E is probably moderate because investors think this modest earnings performance will continue. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

Check out our latest analysis for Hagihara Industries

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

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Hagihara Industries' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.4% last year. This was backed up an excellent period prior to see EPS up by 44% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 2.8% each year over the next three years. With the market predicted to deliver 9.7% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Hagihara Industries is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Hagihara Industries' 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.

Our examination of Hagihara Industries' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about this 1 warning sign we've spotted with Hagihara Industries .

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.