Given a median price-earnings ratio (P/E) of almost 13 in Japan, one might think that one is indifferent to Hankyu Hanshin Holdings, Inc. (TSE:9042) has a P/E ratio of 13.5. This may not be surprising, but if the P/E ratio is not justified, investors may be missing out on a potential opportunity or ignoring an impending disappointment.

Hankyu Hanshin Holdings has certainly done well recently, as the company has been able to grow its earnings more than most. It could be that many are expecting the strong earnings performance to fade, which has prevented the P/E ratio from rising. If you like the company, you hope that doesn’t happen, so you can potentially buy some shares while it’s not in demand.

Check out our latest analysis for Hankyu Hanshin Holdings

Would you like to know how analysts assess the future of Hankyu Hanshin Holdings compared to the industry? In this case, our free Report is a good starting point.

What do growth metrics tell us about the P/E ratio?

A P/E ratio like that of Hankyu Hanshin Holdings would only be safe if the company’s growth was closely in line with the market.

First, let’s take a look back: The company managed to grow its earnings per share by an impressive 40% last year. However, the most recent three-year period was not so successful overall, as it produced no growth at all. Accordingly, shareholders may not have been too happy with the unstable medium-term growth rates.

As for the outlook, the company is expected to deliver a growth of 1.4% per year over the next three years, as estimated by the three analysts covering the company. With the market expected to deliver a growth of 9.3% per year, the company must expect a weaker result.

Given this information, we find it interesting that Hankyu Hanshin Holdings is trading at a P/E ratio that is fairly similar to the market. It seems that many of the company’s investors are less pessimistic than analysts indicate and are currently unwilling to offload their shares. These shareholders could be setting themselves up for future disappointment if the P/E ratio falls to a level that is more in line with the growth prospects.

The last word

It is argued that the price-to-earnings ratio is not a good measure of a company’s value in certain industries, but can be a meaningful indicator of business sentiment.

We have noted that Hankyu Hanshin Holdings is currently trading at a higher than expected P/E ratio as its forecast growth is lower than the wider market. At the moment, we are unhappy with the P/E ratio as its forecast future earnings are unlikely to support a more positive sentiment for long. This puts shareholders’ investments at risk and potential investors risk paying an unnecessary premium.

Before you take the next step, you should know about the 2 warning signs for Hankyu Hanshin Holdings (1 is worrying!) that we uncovered.

If you are interested in P/E ratiosyou might want to see this free Collection of other companies with strong earnings growth and low P/E ratios.

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