Why We're Not Concerned About Murata Manufacturing Co., Ltd.'s (TSE:6981) Share Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Murata Manufacturing Co., Ltd. (TSE:6981) as a stock to avoid entirely with its 34.5x 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 so lofty.

While the market has experienced earnings growth lately, Murata Manufacturing's 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Murata Manufacturing

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

How Is Murata Manufacturing's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 28% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 22% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 23% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 9.6% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Murata Manufacturing is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Murata Manufacturing's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Murata Manufacturing's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Murata Manufacturing with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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