With a price-to-earnings (or “P/E”) ratio of 20.8x BEAUTY GARAGE Inc. (TSE:3180) may be sending 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 9x are not unusual. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for BEAUTY GARAGE as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

See our latest analysis for BEAUTY GARAGE

Keen to find out how analysts think BEAUTY GARAGE’s future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For BEAUTY GARAGE?

The only time you’d be truly comfortable seeing a P/E as high as BEAUTY GARAGE’s is when the company’s growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 25% gain to the company’s bottom line. The latest three year period has also seen an excellent 65% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 22% per annum as estimated by the three analysts watching the company. That’s shaping up to be materially higher than the 9.5% per year growth forecast for the broader market.

In light of this, it’s understandable that BEAUTY GARAGE’s P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From BEAUTY GARAGE’s P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.

We’ve established that BEAUTY GARAGE maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. It’s hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we’ve spotted with BEAUTY GARAGE.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.