Risks To Shareholder Returns Are Elevated At These Prices For The Sumitomo Warehouse Co., Ltd. (TSE:9303)

With a price-to-earnings (or "P/E") ratio of 16.9x The Sumitomo Warehouse Co., Ltd. (TSE:9303) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

We've discovered 2 warning signs about Sumitomo Warehouse. View them for free.

Recent times haven't been advantageous for Sumitomo Warehouse as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Sumitomo Warehouse

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

How Is Sumitomo Warehouse's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Sumitomo Warehouse's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 21% overall from three years ago. 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 3.7% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.7% per year, which is noticeably more attractive.

In light of this, it's alarming that Sumitomo Warehouse's P/E sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Sumitomo Warehouse'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.

We've established that Sumitomo Warehouse currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Sumitomo Warehouse (including 1 which doesn't sit too well with us).

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.