With Renesas Electronics Corporation (TSE:6723) It Looks Like You'll Get What You Pay For

There wouldn't be many who think Renesas Electronics Corporation's (TSE:6723) price-to-earnings (or "P/E") ratio of 14.4x is worth a mention when the median P/E in Japan is similar at about 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times haven't been advantageous for Renesas Electronics as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

View our latest analysis for Renesas Electronics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Renesas Electronics.

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

The only time you'd be comfortable seeing a P/E like Renesas Electronics' is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 6.5% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 529% 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 analysts covering the company suggest earnings should grow by 8.6% each year over the next three years. That's shaping up to be similar to the 10% per annum growth forecast for the broader market.

In light of this, it's understandable that Renesas Electronics' P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Renesas Electronics' analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

Before you settle on your opinion, we've discovered 1 warning sign for Renesas Electronics that you should be aware of.

You might be able to find a better investment than Renesas Electronics. 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.