Mitsui Fudosan Co., Ltd.'s (TSE:8801) Business Is Trailing The Market But Its Shares Aren't

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Mitsui Fudosan Co., Ltd. (TSE:8801) as a stock to potentially avoid with its 18.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Mitsui Fudosan's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Mitsui Fudosan

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

Is There Enough Growth For Mitsui Fudosan?

In order to justify its P/E ratio, Mitsui Fudosan would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 9.5%. The latest three year period has also seen a 24% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 7.8% each year as estimated by the twelve analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 10% each year, which is noticeably more attractive.

In light of this, it's alarming that Mitsui Fudosan's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Mitsui Fudosan'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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Mitsui Fudosan you should be aware of, and 1 of them is concerning.

If you're unsure about the strength of Mitsui Fudosan's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.