With a price-earnings ratio (P/E) of 15.8 DOUTOR NICHIRES Holdings Co., Ltd. (TSE:3087) may be sending bearish signals right now, as nearly half of all companies in Japan have a P/E ratio below 12x, and even P/E ratios below 8x are not uncommon. However, the P/E ratio might be high for a reason, and further research is needed to determine if it is justified.
The recent past has been favorable for DOUTOR NICHIRES Holdings, with the company’s earnings growing faster than most. Many seem to expect the strong earnings performance to continue, which has increased the P/E ratio. If not, existing shareholders may be a little nervous about the profitability of the share price.
Check out our latest analysis for DOUTOR NICHIRES Holdings
Do you want the full picture of analyst estimates for the company? Then our free The DOUTOR NICHIRES Holdings report will help you find out what’s on the horizon.
What do growth metrics tell us about the high P/E ratio?
A P/E ratio as high as that of DOUTOR NICHIRES Holdings would only be truly comfortable if the company is on track to outperform the market.
Looking at earnings growth over the last year, the company posted a terrific 42% increase. However, the last three-year period was not so great overall, showing no growth at all. Accordingly, shareholders would probably not have been too happy with the unstable medium-term growth rates.
Looking ahead, the two analysts covering the company expect earnings to grow 10% per year over the next three years, roughly in line with the 9.8% per year growth forecast for the overall market.
Given this information, we find it interesting that DOUTOR NICHIRES Holdings is trading at a high P/E relative to the market. It appears that many investors in the company are more optimistic than analysts indicate and are not willing to offload their shares at this time. These shareholders may have to prepare for disappointment if the P/E falls to a level more in line with the growth prospects.
The last word
In our view, the price-earnings ratio is not primarily used as a valuation tool, but rather to assess current investor sentiment and future expectations.
Our study of analyst forecasts for DOUTOR NICHIRES Holdings found that the market-based earnings outlook does not drive the high P/E ratio as much as we would have expected. At the moment, we are unhappy with the relatively high share price, as the forecast future earnings are unlikely to sustain such positive sentiment for long. Unless these conditions improve, it is difficult to accept these prices as reasonable.
We don’t want to spoil the fun too much, but we also found 1 warning signal for DOUTOR NICHIRES Holdings that you need to consider.
You may find a better investment than DOUTOR NICHIRES Holdings. If you want a selection of possible candidates, check out this free List of interesting companies that trade at a low P/E ratio (but have proven that they can grow their earnings).
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
