Sompo Holdings, Inc. (TSE:8630) Surges 25% Yet Its Low P/E Is No Reason For Excitement

Sompo Holdings, Inc. (TSE:8630) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 82% in the last year.

Although its price has surged higher, Sompo Holdings' price-to-earnings (or "P/E") ratio of 7.2x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Sompo Holdings has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Sompo Holdings

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

How Is Sompo Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Sompo Holdings' is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 128% last year. The latest three year period has also seen an excellent 158% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.0% per year as estimated by the eleven analysts watching the company. That's not great when the rest of the market is expected to grow by 10% per year.

In light of this, it's understandable that Sompo Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Sompo Holdings' P/E

Despite Sompo Holdings' shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Sompo Holdings maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Sompo Holdings that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.