Investors Still Waiting For A Pull Back In Kotobuki Spirits Co., Ltd. (TSE:2222)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Kotobuki Spirits Co., Ltd. (TSE:2222) as a stock to avoid entirely with its 27.9x 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.

Kotobuki Spirits 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.

Check out our latest analysis for Kotobuki Spirits

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Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 98%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 19% per year over the next three years. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

In light of this, it's understandable that Kotobuki Spirits' 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 Final Word

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.

As we suspected, our examination of Kotobuki Spirits' 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Kotobuki Spirits with six simple checks.

If these risks are making you reconsider your opinion on Kotobuki Spirits, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.