Market Cool On Early Age Co., Ltd.'s (TSE:3248) Earnings

Early Age Co., Ltd.'s (TSE:3248) price-to-earnings (or "P/E") ratio of 10.1x might make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 22x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

The earnings growth achieved at Early Age over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

See our latest analysis for Early Age

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Early Age's earnings, revenue and cash flow.

How Is Early Age's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. The strong recent performance means it was also able to grow EPS by 51% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 9.8% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Early Age's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Early Age's P/E?

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.

We've established that Early Age currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Before you settle on your opinion, we've discovered 4 warning signs for Early Age (2 are significant!) that you should be aware of.

Of course, you might also be able to find a better stock than Early Age. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.