Otsuka Holdings Co., Ltd.'s (TSE:4578) Price In Tune With Earnings

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Otsuka Holdings Co., Ltd. (TSE:4578) as a stock to avoid entirely with its 39x 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.

Otsuka Holdings could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Otsuka Holdings

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

How Is Otsuka Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Otsuka 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 24%. This means it has also seen a slide in earnings over the longer-term as EPS is down 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 25% each year as estimated by the eleven 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 Otsuka 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 Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Otsuka 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Otsuka Holdings that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.