Otsuka Corporation (TSE:4768) Investors Are Less Pessimistic Than Expected
With a price-to-earnings (or "P/E") ratio of 19.6x Otsuka Corporation (TSE:4768) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Otsuka as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Otsuka
What Are Growth Metrics Telling Us About The High P/E?
Otsuka's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 24%. Pleasingly, EPS has also lifted 60% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 3.0% each year during the coming three years according to the eleven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 8.9% each year, which is noticeably more attractive.
With this information, we find it concerning that Otsuka is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.
We've established that Otsuka currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Otsuka with six simple checks on some of these key factors.
If you're unsure about the strength of Otsuka's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.