ABC-Mart,Inc.'s (TSE:2670) Business Is Yet to Catch Up With Its Share Price

ABC-Mart,Inc.'s (TSE:2670) price-to-earnings (or "P/E") ratio of 18.3x 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.

ABC-MartInc certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for ABC-MartInc

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

How Is ABC-MartInc's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like ABC-MartInc's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 17% gain to the company's bottom line. Pleasingly, EPS has also lifted 75% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 3.4% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.3% each year, which is noticeably more attractive.

With this information, we find it concerning that ABC-MartInc is trading at a P/E higher than the market. 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

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.

Our examination of ABC-MartInc'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. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for ABC-MartInc that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.