Watahan & Co.,Ltd. (TSE:3199) Screens Well But There Might Be A Catch

There wouldn't be many who think Watahan & Co.,Ltd.'s (TSE:3199) price-to-earnings (or "P/E") ratio of 11.2x is worth a mention when the median P/E in Japan is similar at about 11x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been quite advantageous for WatahanLtd as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for WatahanLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on WatahanLtd will help you shine a light on its historical performance.

Does Growth Match The P/E?

In order to justify its P/E ratio, WatahanLtd would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 39% gain to the company's bottom line. The latest three year period has also seen an excellent 82% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 10% shows it's noticeably more attractive on an annualised basis.

In light of this, it's curious that WatahanLtd's P/E sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

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 WatahanLtd currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market 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 if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with WatahanLtd (at least 1 which is potentially serious), and understanding them should be part of your investment process.

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.