With a price-to-earnings (or “P/E”) ratio of 26.2x Internet Initiative Japan Inc. (TSE:3774) may be sending very bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 14x and even P/E’s lower than 10x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Recent times have been advantageous for Internet Initiative Japan as its earnings have been rising faster 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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Is There Enough Growth For Internet Initiative Japan?
Internet Initiative Japan’s P/E ratio would be typical for a company that’s expected to deliver very strong growth, and importantly, perform much better than the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. This was backed up an excellent period prior to see EPS up by 196% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 19% per annum over the next three years. That’s shaping up to be materially higher than the 11% per year growth forecast for the broader market.
With this information, we can see why Internet Initiative Japan is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Internet Initiative Japan’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren’t under threat. Unless these conditions change, they will continue to provide strong support to the share price.
The company’s balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Internet Initiative Japan with six simple checks on some of these key factors.
You might be able to find a better investment than Internet Initiative Japan. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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Find out whether Internet Initiative Japan is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
Tyler Fields is your internet guru, delving into the latest trends, developments, and issues shaping the online world. With a focus on internet culture, cybersecurity, and emerging technologies, Tyler keeps readers informed about the dynamic landscape of the internet and its impact on our digital lives.