Some Confidence Is Lacking In U-NEXT HOLDINGS Co.,Ltd.'s (TSE:9418) P/E

U-NEXT HOLDINGS Co.,Ltd.'s (TSE:9418) price-to-earnings (or "P/E") ratio of 20.6x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

U-NEXT HOLDINGSLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out 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.

How Is U-NEXT HOLDINGSLtd's Growth Trending?

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.

Retrospectively, the last year delivered an exceptional 22% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 96% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 9.9% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.2% per year, which is not materially different.

With this information, we find it interesting that U-NEXT HOLDINGSLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From U-NEXT HOLDINGSLtd'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.

We've established that U-NEXT HOLDINGSLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for U-NEXT HOLDINGSLtd with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than U-NEXT HOLDINGSLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.