Risks To Shareholder Returns Are Elevated At These Prices For BANDAI NAMCO Holdings Inc. (TSE:7832)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider BANDAI NAMCO Holdings Inc. (TSE:7832) as a stock to potentially avoid with its 21.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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BANDAI NAMCO Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for BANDAI NAMCO Holdings

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

How Is BANDAI NAMCO Holdings' Growth Trending?

In order to justify its P/E ratio, BANDAI NAMCO Holdings would need to produce impressive growth in excess of 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. Fortunately, a few good years before that means that it was still able to grow EPS by 8.5% in total over the last three years. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 7.5% per annum as estimated by the analysts watching the company. That's shaping up to be similar to the 9.0% per annum growth forecast for the broader market.

In light of this, it's curious that BANDAI NAMCO Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

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.

Our examination of BANDAI NAMCO Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for BANDAI NAMCO Holdings with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than BANDAI NAMCO Holdings. 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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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.