There's Reason For Concern Over MTG Co., Ltd.'s (TSE:7806) Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider MTG Co., Ltd. (TSE:7806) as a stock to avoid entirely with its 21.8x 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.

With earnings growth that's superior to most other companies of late, MTG has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for MTG

Want the full picture on analyst estimates for the company? Then our free report on MTG will help you uncover what's on the horizon.

Is There Enough Growth For MTG?

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

Retrospectively, the last year delivered an exceptional 116% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 25% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 0.5% per year during the coming three years according to the four analysts following the company. That's not great when the rest of the market is expected to grow by 9.3% each year.

In light of this, it's alarming that MTG's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Bottom Line On MTG's P/E

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.

We've established that MTG currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for MTG that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.