Sumitomo Bakelite Company Limited (TSE:4203) Not Lagging Market On Growth Or Pricing

With a price-to-earnings (or "P/E") ratio of 16.4x Sumitomo Bakelite Company Limited (TSE:4203) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 11x and even P/E's lower than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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Sumitomo Bakelite 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. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Sumitomo Bakelite

Keen to find out how analysts think Sumitomo Bakelite's future stacks up against the industry? In that case, our free report is a great place to start .

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Sumitomo Bakelite's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 25% each year during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 9.7% each year, which is noticeably less attractive.

In light of this, it's understandable that Sumitomo Bakelite'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.

What We Can Learn From Sumitomo Bakelite's P/E?

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.

As we suspected, our examination of Sumitomo Bakelite'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. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Sumitomo Bakelite you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.