Square Enix Holdings Co., Ltd. (TSE:9684) Shares Slammed 26% But Getting In Cheap Might Be Difficult Regardless

The Square Enix Holdings Co., Ltd. (TSE:9684) share price has fared very poorly over the last month, falling by a substantial 26%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 30% in that time.

In spite of the heavy fall in price, Square Enix Holdings' price-to-earnings (or "P/E") ratio of 37.1x might still 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 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

While the market has experienced earnings growth lately, Square Enix Holdings' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Square Enix Holdings

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

Is There Enough Growth For Square Enix Holdings?

The only time you'd be truly comfortable seeing a P/E as steep as Square Enix Holdings' is when the company's growth is on track to outshine the market decidedly.

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 70%. As a result, earnings from three years ago have also fallen 45% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 35% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.6% per annum growth forecast for the broader market.

In light of this, it's understandable that Square Enix Holdings' 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 Final Word

A significant share price dive has done very little to deflate Square Enix Holdings' very lofty P/E. 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.

As we suspected, our examination of Square Enix Holdings' 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for Square Enix Holdings that you should be aware of.

You might be able to find a better investment than Square Enix Holdings. 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.