Sugi Holdings Co.,Ltd.'s (TSE:7649) Shareholders Might Be Looking For Exit

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Sugi Holdings Co.,Ltd. (TSE:7649) as a stock to potentially avoid with its 20x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Sugi HoldingsLtd as its earnings have been rising faster 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.

See our latest analysis for Sugi HoldingsLtd

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

Is There Enough Growth For Sugi HoldingsLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Sugi HoldingsLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 251% last year. EPS has also lifted 6.6% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 24% per annum during the coming three years according to the nine analysts following the company. Meanwhile, the broader market is forecast to expand by 9.5% each year, which paints a poor picture.

In light of this, it's alarming that Sugi HoldingsLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Sugi HoldingsLtd's 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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Sugi HoldingsLtd with six simple checks will allow you to discover any risks that could be an issue.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.