Investors Still Waiting For A Pull Back In Shin-Etsu Chemical Co., Ltd. (TSE:4063)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Shin-Etsu Chemical Co., Ltd. (TSE:4063) as a stock to potentially avoid with its 16.2x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's inferior to most other companies of late, Shin-Etsu Chemical has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Shin-Etsu Chemical

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Is There Enough Growth For Shin-Etsu Chemical?

In order to justify its P/E ratio, Shin-Etsu Chemical would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.0% last year. The latest three year period has also seen an excellent 32% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% per year over the next three years. With the market only predicted to deliver 9.2% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Shin-Etsu Chemical is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Shin-Etsu Chemical'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.

We've established that Shin-Etsu Chemical 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. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - Shin-Etsu Chemical has 1 warning sign we think 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.

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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.