With GMO Financial Gate, Inc. (TSE:4051) It Looks Like You'll Get What You Pay For

GMO Financial Gate, Inc.'s (TSE:4051) price-to-earnings (or "P/E") ratio of 67.2x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for GMO Financial Gate 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 GMO Financial Gate

Keen to find out how analysts think GMO Financial Gate's future stacks up against the industry? In that case, our free report is a great place to start.

How Is GMO Financial Gate's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 42% gain to the company's bottom line. Pleasingly, EPS has also lifted 174% 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.

Turning to the outlook, the next three years should generate growth of 34% per year as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 9.6% per year growth forecast for the broader market.

With this information, we can see why GMO Financial Gate is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On GMO Financial Gate's P/E

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.

As we suspected, our examination of GMO Financial Gate's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for GMO Financial Gate that you need to take into consideration.

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.

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