Unpleasant Surprises Could Be In Store For SG Holdings Co.,Ltd.'s (TSE:9143) Shares

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider SG Holdings Co.,Ltd. (TSE:9143) as a stock to potentially avoid with its 17.7x 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 as high as it is.

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

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

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

In order to justify its P/E ratio, SG HoldingsLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 6.3% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 7.2% per annum during the coming three years according to the nine analysts following the company. Meanwhile, the rest of the market is forecast to expand by 9.9% each year, which is noticeably more attractive.

In light of this, it's alarming that SG HoldingsLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of SG HoldingsLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for SG HoldingsLtd you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.