Some Confidence Is Lacking In Marusan Securities Co., Ltd. (TSE:8613) As Shares Slide 25%

The Marusan Securities Co., Ltd. (TSE:8613) share price has fared very poorly over the last month, falling by a substantial 25%. Looking at the bigger picture, even after this poor month the stock is up 65% in the last year.

Even after such a large drop in price, given around half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may still consider Marusan Securities as a stock to potentially avoid with its 17.6x 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.

With earnings growth that's exceedingly strong of late, Marusan Securities has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Marusan Securities

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Marusan Securities' earnings, revenue and cash flow.

How Is Marusan Securities' Growth Trending?

In order to justify its P/E ratio, Marusan Securities would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 158% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 24% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 9.8% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Marusan Securities is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Marusan Securities' P/E?

Marusan Securities' P/E hasn't come down all the way after its stock plunged. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Marusan Securities revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

You might be able to find a better investment than Marusan Securities. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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