Why We're Not Concerned About Kakaku.com, Inc.'s (TSE:2371) Share Price

Kakaku.com, Inc.'s (TSE:2371) price-to-earnings (or "P/E") ratio of 26.9x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Kakaku.com could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Kakaku.com

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Kakaku.com would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a decent 5.8% gain to the company's bottom line. The latest three year period has also seen an excellent 33% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 14% per annum over the next three years. With the market only predicted to deliver 9.5% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Kakaku.com'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.

What We Can Learn From Kakaku.com'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 Kakaku.com'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.

Having said that, be aware Kakaku.com is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Kakaku.com, 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.