OBIC Co.,Ltd.'s (TSE:4684) Business Is Trailing The Market But Its Shares Aren't

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider OBIC Co.,Ltd. (TSE:4684) as a stock to avoid entirely with its 35.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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OBICLtd's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for OBICLtd

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, OBICLtd would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. Pleasingly, EPS has also lifted 50% in aggregate from three years ago, partly 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 eleven analysts covering the company suggest earnings should grow by 9.5% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.0% per year, which is not materially different.

In light of this, it's curious that OBICLtd's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From OBICLtd'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.

Our examination of OBICLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary 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 OBICLtd with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than OBICLtd. 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.