Shareholders Should Be Pleased With LY Corporation's (TSE:4689) Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider LY Corporation (TSE:4689) as a stock to avoid entirely with its 23.5x 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.

LY hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.

Check out our latest analysis for LY

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

How Is LY's Growth Trending?

In order to justify its P/E ratio, LY would need to produce outstanding growth well in excess of 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 33%. Still, the latest three year period has seen an excellent 38% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the twelve analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.5% per annum, which is noticeably less attractive.

In light of this, it's understandable that LY'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 Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that LY maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for LY you should know about.

Of course, you might also be able to find a better stock than LY. 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.