Investors Appear Satisfied With Ota Floriculture Auction Co.,Ltd.'s (TYO:7555) Prospects

With a price-to-earnings (or "P/E") ratio of 72.9x Ota Floriculture Auction Co.,Ltd. (TYO:7555) may be sending very bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 15x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Ota Floriculture AuctionLtd has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Ota Floriculture AuctionLtd

Where Does Ota Floriculture AuctionLtd's P/E Sit Within Its Industry?

It's plausible that Ota Floriculture AuctionLtd's particularly high P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Retail Distributors industry are similar to the market. So we'd say there is little merit in the premise that the company's ratio being shaped by its industry at this time. Ordinarily, the majority of companies' P/E's would be constrained by the general conditions within the Retail Distributors industry. Ultimately though, it's going to be the fundamentals of the business like earnings and growth that count most.

Although there are no analyst estimates available for Ota Floriculture AuctionLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

Ota Floriculture AuctionLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 41% last year. The strong recent performance means it was also able to grow EPS by 60% 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.

Weighing the recent medium-term upward earnings trajectory against the broader market's one-year forecast for contraction of 6.4% shows it's a great look while it lasts.

In light of this, it's understandable that Ota Floriculture AuctionLtd's P/E sits above the majority of other companies. Investors are willing to pay more for a stock they hope will buck the trend of the broader market going backwards. However, its current earnings trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

What We Can Learn From Ota Floriculture AuctionLtd's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Ota Floriculture AuctionLtd revealed its growing earnings over the medium-term are contributing to its high P/E, given the market is set to shrink. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Ota Floriculture AuctionLtd (2 are significant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Ota Floriculture AuctionLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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