Some Shareholders Feeling Restless Over Koei Tecmo Holdings Co., Ltd.'s (TSE:3635) P/E Ratio

There wouldn't be many who think Koei Tecmo Holdings Co., Ltd.'s (TSE:3635) price-to-earnings (or "P/E") ratio of 12.3x is worth a mention when the median P/E in Japan is similar at about 13x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's inferior to most other companies of late, Koei Tecmo Holdings has been relatively sluggish. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Koei Tecmo Holdings

Keen to find out how analysts think Koei Tecmo Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The P/E?

Koei Tecmo Holdings' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.0%. EPS has also lifted 6.5% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings growth is heading into negative territory, declining 5.6% per year over the next three years. That's not great when the rest of the market is expected to grow by 9.3% per annum.

In light of this, it's somewhat alarming that Koei Tecmo Holdings' P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Final Word

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 Koei Tecmo Holdings currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Koei Tecmo Holdings that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.