Shareholders Should Be Pleased With Hamamatsu Photonics K.K.'s (TSE:6965) Price

With a price-to-earnings (or "P/E") ratio of 30.6x Hamamatsu Photonics K.K. (TSE:6965) may be sending very 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 quite high for a reason and it requires further investigation to determine if it's justified.

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Hamamatsu Photonics K.K hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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 Hamamatsu Photonics K.K

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 47% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 8.8% per annum, which is noticeably less attractive.

In light of this, it's understandable that Hamamatsu Photonics K.K's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Hamamatsu Photonics K.K's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Hamamatsu Photonics K.K's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hamamatsu Photonics K.K you should know about.

If you're unsure about the strength of Hamamatsu Photonics K.K's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.