Hirose Electric Co.,Ltd. (TSE:6806) Investors Are Less Pessimistic Than Expected

With a price-to-earnings (or "P/E") ratio of 17.9x Hirose Electric Co.,Ltd. (TSE:6806) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Hirose ElectricLtd has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Hirose ElectricLtd

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

How Is Hirose ElectricLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Hirose ElectricLtd's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. The latest three year period has also seen a 10% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Looking ahead now, EPS is anticipated to climb by 4.6% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 8.6% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Hirose ElectricLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

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.

Our examination of Hirose ElectricLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Hirose ElectricLtd that you need to take into consideration.

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