Earnings Tell The Story For Daiichikosho Co., Ltd. (TSE:7458)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Daiichikosho Co., Ltd. (TSE:7458) as a stock to potentially avoid with its 21.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

There hasn't been much to differentiate Daiichikosho's and the market's earnings growth lately. It might be that many expect the mediocre 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.

See our latest analysis for Daiichikosho

Want the full picture on analyst estimates for the company? Then our free report on Daiichikosho will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Daiichikosho's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 10%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 41% over the next year. That's shaping up to be materially higher than the 11% growth forecast for the broader market.

In light of this, it's understandable that Daiichikosho'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

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 Daiichikosho's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Daiichikosho with six simple checks on some of these key factors.

You might be able to find a better investment than Daiichikosho. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.