CyberAgent, Inc.'s (TSE:4751) P/E Still Appears To Be Reasonable

CyberAgent, Inc.'s (TSE:4751) price-to-earnings (or "P/E") ratio of 35.5x 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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CyberAgent 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.

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Is There Enough Growth For CyberAgent?

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

Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 8.6% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 18% per year over the next three years. With the market only predicted to deliver 9.5% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why CyberAgent 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

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of CyberAgent'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. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for CyberAgent with six simple checks will allow you to discover any risks that could be an issue.

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