Sumitomo Realty & Development Co., Ltd.'s (TSE:8830) Business Is Trailing The Market But Its Shares Aren't

It's not a stretch to say that Sumitomo Realty & Development Co., Ltd.'s (TSE:8830) price-to-earnings (or "P/E") ratio of 14.9x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 14x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Sumitomo Realty & Development 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 moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Sumitomo Realty & Development

Want the full picture on analyst estimates for the company? Then our free report on Sumitomo Realty & Development will help you uncover what's on the horizon.

Is There Some Growth For Sumitomo Realty & Development?

Sumitomo Realty & Development's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.5%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 26% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 7.0% per annum during the coming three years according to the eleven analysts following the company. With the market predicted to deliver 9.5% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Sumitomo Realty & Development is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Sumitomo Realty & Development'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 Sumitomo Realty & Development currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Sumitomo Realty & Development that you need to take into consideration.

You might be able to find a better investment than Sumitomo Realty & Development. 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.