Why We're Not Concerned About Mitsui Fudosan Co., Ltd.'s (TSE:8801) Share Price

Mitsui Fudosan Co., Ltd.'s (TSE:8801) price-to-earnings (or "P/E") ratio of 18.8x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Mitsui Fudosan hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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How Is Mitsui Fudosan's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Mitsui Fudosan's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 18%. The last three years don't look nice either as the company has shrunk EPS by 8.0% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 17% per annum as estimated by the eleven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 11% per annum, which is noticeably less attractive.

With this information, we can see why Mitsui Fudosan is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

We've established that Mitsui Fudosan maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Mitsui Fudosan (1 doesn't sit too well with us!) that you should be aware of.

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.