Square Enix Holdings Co., Ltd. (TSE:9684) Not Flying Under The Radar
When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Square Enix Holdings Co., Ltd. (TSE:9684) as a stock to avoid entirely with its 46x 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.
Square Enix Holdings certainly has been doing a good job lately as it's been growing earnings more 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.
View our latest analysis for Square Enix Holdings
How Is Square Enix Holdings' Growth Trending?
In order to justify its P/E ratio, Square Enix Holdings would need to produce outstanding growth well in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 126% last year. Still, incredibly EPS has fallen 67% in total from three years ago, which is quite disappointing. 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 20% per year as estimated by the analysts watching the company. With the market only predicted to deliver 9.0% each year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Square Enix Holdings' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
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 Square Enix Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. 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 Square Enix Holdings.
You might be able to find a better investment than Square Enix Holdings. 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.