Subdued Growth No Barrier To Segue Group Co., Ltd. (TSE:3968) With Shares Advancing 30%

The Segue Group Co., Ltd. (TSE:3968) share price has done very well over the last month, posting an excellent gain of 30%. Notwithstanding the latest gain, the annual share price return of 9.4% isn't as impressive.

After such a large jump in price, Segue Group's price-to-earnings (or "P/E") ratio of 43.6x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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For instance, Segue Group's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Segue Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Segue Group will help you shine a light on its historical performance.

Is There Enough Growth For Segue Group?

The only time you'd be truly comfortable seeing a P/E as steep as Segue Group's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 26% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 11% shows it's an unpleasant look.

With this information, we find it concerning that Segue Group is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Shares in Segue Group have built up some good momentum lately, which has really inflated its P/E. 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 Segue Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Segue Group (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Segue Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.