What SoftBank Corp.'s (TSE:9434) P/E Is Not Telling You

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider SoftBank Corp. (TSE:9434) as a stock to potentially avoid with its 21.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

SoftBank could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for SoftBank

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

Is There Enough Growth For SoftBank?

The only time you'd be truly comfortable seeing a P/E as high as SoftBank's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 29% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 8.9% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the analysts watching the company. That's shaping up to be similar to the 10% per year growth forecast for the broader market.

In light of this, it's curious that SoftBank's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of SoftBank's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - SoftBank has 4 warning signs (and 1 which is significant) we think you should know about.

You might be able to find a better investment than SoftBank. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.