With GMO Payment Gateway, Inc. (TSE:3769) It Looks Like You'll Get What You Pay For

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider GMO Payment Gateway, Inc. (TSE:3769) as a stock to avoid entirely with its 35.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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GMO Payment Gateway certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is GMO Payment Gateway's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as GMO Payment Gateway's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 29% last year. The latest three year period has also seen an excellent 99% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the eleven analysts watching the company. With the market only predicted to deliver 8.7% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that GMO Payment Gateway's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On GMO Payment Gateway's 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.

We've established that GMO Payment Gateway maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for GMO Payment Gateway with six simple checks.

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

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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.