eGuarantee, Inc.'s (TSE:8771) P/E Still Appears To Be Reasonable

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider eGuarantee, Inc. (TSE:8771) as a stock to avoid entirely with its 22.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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eGuarantee's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for eGuarantee

If you'd like to see what analysts are forecasting going forward, you should check out our free report on eGuarantee.

Is There Enough Growth For eGuarantee?

In order to justify its P/E ratio, eGuarantee would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.0% last year. The latest three year period has also seen an excellent 38% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 12% per year over the next three years. With the market only predicted to deliver 9.7% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that eGuarantee's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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 eGuarantee 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for eGuarantee with six simple checks will allow you to discover any risks that could be an issue.

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.