NTT DATA Group Corporation's (TSE:9613) P/E Still Appears To Be Reasonable

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider NTT DATA Group Corporation (TSE:9613) as a stock to avoid entirely with its 26.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, NTT DATA Group has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for NTT DATA Group

Keen to find out how analysts think NTT DATA Group's future stacks up against the industry? In that case, our free report is a great place to start.

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

There's an inherent assumption that a company should far outperform the market for P/E ratios like NTT DATA Group's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 15% last year. EPS has also lifted 24% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the twelve analysts covering the company suggest earnings should grow by 12% each year over the next three years. With the market only predicted to deliver 9.3% per year, the company is positioned for a stronger earnings result.

With this information, we can see why NTT DATA Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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.

As we suspected, our examination of NTT DATA Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for NTT DATA Group you should be aware of.

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