What You Can Learn From Enplas Corporation's (TSE:6961) P/E

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Enplas Corporation (TSE:6961) as a stock to avoid entirely with its 21.1x 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.

While the market has experienced earnings growth lately, Enplas' earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Enplas

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

How Is Enplas' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. Still, the latest three year period has seen an excellent 392% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 28% per year during the coming three years according to the two analysts following the company. With the market only predicted to deliver 9.6% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Enplas 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 Final Word

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 Enplas 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. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Enplas is showing 1 warning sign in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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