Subdued Growth No Barrier To Tsuruha Holdings Inc.'s (TSE:3391) Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Tsuruha Holdings Inc. (TSE:3391) as a stock to potentially avoid with its 17.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Tsuruha Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Tsuruha Holdings

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What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Tsuruha Holdings' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 4.6% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 8.6% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 9.5% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.4% each year, which is not materially different.

With this information, we find it interesting that Tsuruha Holdings is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

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.

We've established that Tsuruha Holdings currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Tsuruha Holdings that you should be aware of.

If you're unsure about the strength of Tsuruha Holdings' 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.