Shin-Etsu Chemical Co., Ltd.'s (TSE:4063) Earnings Haven't Escaped The Attention Of Investors

There wouldn't be many who think Shin-Etsu Chemical Co., Ltd.'s (TSE:4063) price-to-earnings (or "P/E") ratio of 16.4x is worth a mention when the median P/E in Japan is similar at about 15x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Shin-Etsu Chemical could be doing better as it's been growing earnings less than most other companies lately. It might be that many expect the uninspiring earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Shin-Etsu Chemical

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

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Shin-Etsu Chemical would need to produce growth that's similar to the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 3.3% last year. Still, lamentably EPS has fallen 2.8% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 9.6% growth each year, the company is positioned for a comparable earnings result.

With this information, we can see why Shin-Etsu Chemical is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Shin-Etsu Chemical's P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shin-Etsu Chemical's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shin-Etsu Chemical that you need to be mindful of.

Of course, you might also be able to find a better stock than Shin-Etsu Chemical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.