Investor Optimism Abounds Fujimi Incorporated (TSE:5384) But Growth Is Lacking

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Fujimi Incorporated (TSE:5384) as a stock to potentially avoid with its 19x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Fujimi certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Fujimi

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

Does Growth Match The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 36%. Still, incredibly EPS has fallen 7.7% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 6.3% each year as estimated by the six analysts watching the company. With the market predicted to deliver 9.5% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Fujimi is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Fujimi's P/E?

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 Fujimi currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, 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.

You always need to take note of risks, for example - Fujimi has 1 warning sign we think you should be aware of.

Of course, you might also be able to find a better stock than Fujimi. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.