The Fanuc Corporation (TSE:6954) share price could indicate some risk

When almost half of the companies in Japan have price-to-earnings (or “P/E”) ratios below 13x, you might think about it Fanuc Corporation (TSE:6954) is a stock to definitely avoid due to its P/E ratio of 26.7. However, it is not advisable to simply take the P/E ratio at face value, as there may be an explanation as to why it is so high.

Fanuc has not performed well recently as its declining profits compare poorly to other companies that have, on average, experienced some growth. It could be that many are expecting the weak earnings performance to recover significantly, which has prevented the P/E ratio from crashing. You’d really hope so, otherwise you’ll be paying a pretty hefty price for no particular reason.

Check out our latest analysis for Fanuc

If you want to see what analysts are predicting for the future, you should check out our free Report on Fanuc.

How is Fanuc growing?

There is an inherent assumption that for P/E ratios like Fanuc’s to be considered reasonable, a company should far outperform the market.

If we first look back, the company’s earnings per share growth last year was nothing to cheer about as it posted a disappointing decline of 6.6%. This means there has been a longer-term decline in earnings too, with earnings per share falling 1.3% overall over the last three years. Unfortunately, we have to admit that the company has failed to increase its profits during this time.

Looking ahead, estimates from the company’s analysts suggest that earnings are expected to grow 8.1% per year over the next three years. That is likely to be well below the 10% annual growth forecast for the broader market.

Based on this information, we find it concerning that Fanuc is trading at a P/E ratio that is higher than the market. Apparently, many of the company’s investors are much more optimistic than analysts suggest and are unwilling to offload their shares at any price. There’s a good chance these shareholders are setting themselves up for future disappointment if the P/E ratio falls to a level more in line with its growth prospects.

What can we learn from Fanuc’s P/E ratio?

We would say that the price-to-earnings ratio is not primarily a valuation tool, but rather is used to measure current investor sentiment and future expectations.

We have found that Fanuc is currently trading at a much higher P/E than expected as its forecast growth is lower than that of the overall market. If we see a weak earnings outlook with slower growth than the market, we suspect the share price is at risk of falling, which would result in a decline in the high P/E ratio. This puts shareholders’ investments at significant risk and potential investors risk paying an excessive premium.

Before you decide on an opinion, we found out 1 warning sign for Fanuc what you should be aware of.

Naturally, You may also find a better stock than Fanuc. Maybe you would like to see this free Collection of other companies that have reasonable P/E ratios and have grown profits significantly.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.