Investors Appear Satisfied With Japan Aviation Electronics Industry, Limited's (TSE:6807) Prospects

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Japan Aviation Electronics Industry, Limited (TSE:6807) as a stock to potentially avoid with its 20.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

While the market has experienced earnings growth lately, Japan Aviation Electronics Industry's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Japan Aviation Electronics Industry

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

Is There Enough Growth For Japan Aviation Electronics Industry?

In order to justify its P/E ratio, Japan Aviation Electronics Industry would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 24%. The last three years don't look nice either as the company has shrunk EPS by 40% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 18% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.0% each year, which is noticeably less attractive.

With this information, we can see why Japan Aviation Electronics Industry is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Japan Aviation Electronics Industry's P/E

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 Japan Aviation Electronics Industry maintains its high P/E on the strength of its forecast growth being higher than the wider market, 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Japan Aviation Electronics Industry you should be aware of.

You might be able to find a better investment than Japan Aviation Electronics Industry. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.