Unpleasant Surprises Could Be In Store For McDonald's Holdings Company (Japan), Ltd.'s (TSE:2702) Shares

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider McDonald's Holdings Company (Japan), Ltd. (TSE:2702) as a stock to avoid entirely with its 24x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Recent times have been advantageous for McDonald's Holdings Company (Japan) 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.

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How Is McDonald's Holdings Company (Japan)'s Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like McDonald's Holdings Company (Japan)'s to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 23%. Pleasingly, EPS has also lifted 35% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 4.0% per annum over the next three years. That's shaping up to be materially lower than the 8.9% per year growth forecast for the broader market.

With this information, we find it concerning that McDonald's Holdings Company (Japan) is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On McDonald's Holdings Company (Japan)'s P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that McDonald's Holdings Company (Japan) currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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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.