Earnings Tell The Story For Amada Co., Ltd. (TSE:6113)
When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Amada Co., Ltd. (TSE:6113) as a stock to avoid entirely with its 21.5x 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.
Amada hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Amada
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Amada's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. This means it has also seen a slide in earnings over the longer-term as EPS is down 4.0% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 24% per year over the next three years. With the market only predicted to deliver 9.1% each year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Amada'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.
The Final Word
It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Amada's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Plus, you should also learn about this 1 warning sign we've spotted with Amada.
You might be able to find a better investment than Amada. 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).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.