What You Can Learn From Menicon Co., Ltd.'s (TSE:7780) P/E

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Menicon Co., Ltd. (TSE:7780) as a stock to avoid entirely with its 20.2x 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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Menicon could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Menicon

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

What Are Growth Metrics Telling Us About The High P/E?

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

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 21% drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 27% per year as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.7% per year, which is noticeably less attractive.

In light of this, it's understandable that Menicon'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.

What We Can Learn From Menicon'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 Menicon's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Menicon you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.