Getting In Cheap On U-NEXT HOLDINGS Co.,Ltd. (TSE:9418) Might Be Difficult

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider U-NEXT HOLDINGS Co.,Ltd. (TSE:9418) as a stock to avoid entirely with its 25.5x 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.

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U-NEXT HOLDINGSLtd's earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for U-NEXT HOLDINGSLtd

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

What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings growth, the company posted a worthy increase of 8.8%. Pleasingly, EPS has also lifted 99% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 8.6% each year, which is noticeably less attractive.

In light of this, it's understandable that U-NEXT HOLDINGSLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From U-NEXT HOLDINGSLtd's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of U-NEXT HOLDINGSLtd'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. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for U-NEXT HOLDINGSLtd with six simple checks.

If you're unsure about the strength of U-NEXT HOLDINGSLtd'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.