Getting In Cheap On Hamamatsu Photonics K.K. (TSE:6965) Is Unlikely

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider Hamamatsu Photonics K.K. (TSE:6965) as a stock to avoid entirely with its 21.7x 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.

Hamamatsu Photonics K.K could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Hamamatsu Photonics K.K

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

How Is Hamamatsu Photonics K.K's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Hamamatsu Photonics K.K's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 41%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 5.2% each year over the next three years. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader market.

With this information, we find it concerning that Hamamatsu Photonics K.K is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Hamamatsu Photonics K.K'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. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Hamamatsu Photonics K.K that we have uncovered.

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.