What Toei Company, Ltd.'s (TSE:9605) P/E Is Not Telling You

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Toei Company, Ltd. (TSE:9605) as a stock to avoid entirely 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 highly elevated P/E.

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With earnings growth that's superior to most other companies of late, Toei Company has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Toei Company

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

Is There Enough Growth For Toei Company?

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

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. The latest three year period has also seen an excellent 37% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 6.0% per annum as estimated by the three analysts watching the company. With the market predicted to deliver 9.8% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Toei Company is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Toei Company's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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

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