Market Participants Recognise Shin-Etsu Chemical Co., Ltd.'s (TSE:4063) Earnings

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 avoid entirely with its 23.2x 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.

Shin-Etsu Chemical could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Shin-Etsu Chemical

Keen to find out how analysts think Shin-Etsu Chemical's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. Even so, admirably EPS has lifted 67% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 14% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.6% per year, which is noticeably less attractive.

In light of this, it's understandable that Shin-Etsu Chemical's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shin-Etsu Chemical's P/E

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

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shin-Etsu Chemical with six simple checks will allow you to discover any risks that could be an issue.

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.