Investors Appear Satisfied With UACJ Corporation's (TSE:5741) Prospects

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider UACJ Corporation (TSE:5741) as a stock to potentially avoid with its 19.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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UACJ could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for UACJ

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

Is There Enough Growth For UACJ?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 41%. As a result, earnings from three years ago have also fallen 58% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 28% per annum during the coming three years according to the six analysts following the company. That's shaping up to be materially higher than the 9.6% each year growth forecast for the broader market.

With this information, we can see why UACJ is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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.

As we suspected, our examination of UACJ's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for UACJ (of which 1 is a bit concerning!) you should know about.

If these risks are making you reconsider your opinion on UACJ, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.