ASJ Inc.'s (TSE:2351) Popularity With Investors Is Clear

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider ASJ Inc. (TSE:2351) as a stock to potentially avoid with its 20.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

ASJ certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for ASJ

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on ASJ's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, ASJ 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 446%. The latest three year period has also seen an excellent 166% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 13% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why ASJ is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

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.

We've established that ASJ maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Having said that, be aware ASJ is showing 2 warning signs in our investment analysis, you should know about.

You might be able to find a better investment than ASJ. 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.