Shareholders Should Be Pleased With Bengo4.com,Inc.'s (TSE:6027) Price

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Bengo4.com,Inc. (TSE:6027) as a stock to avoid entirely with its 53.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Bengo4.comInc 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Bengo4.comInc would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 61% gain to the company's bottom line. The latest three year period has also seen an excellent 106% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 45% each year over the next three years. 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 Bengo4.comInc's 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.

What We Can Learn From Bengo4.comInc'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.

We've established that Bengo4.comInc 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Bengo4.comInc that you should be aware of.

If you're unsure about the strength of Bengo4.comInc's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.