Risks To Shareholder Returns Are Elevated At These Prices For ABC-Mart,Inc. (TSE:2670)

With a price-to-earnings (or "P/E") ratio of 19.2x ABC-Mart,Inc. (TSE:2670) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 14x 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 elevated P/E.

With earnings growth that's superior to most other companies of late, ABC-MartInc has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for ABC-MartInc

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How Is ABC-MartInc's Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 32%. The strong recent performance means it was also able to grow EPS by 108% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 3.3% each year over the next three years. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader market.

In light of this, it's alarming that ABC-MartInc's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Bottom Line On ABC-MartInc's P/E

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 ABC-MartInc currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for ABC-MartInc with six simple checks on some of these key factors.

If you're unsure about the strength of ABC-MartInc'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.