Investors Don't See Light At End Of Toyo Tire Corporation's (TSE:5105) Tunnel And Push Stock Down 25%

To the annoyance of some shareholders, Toyo Tire Corporation (TSE:5105) shares are down a considerable 25% in the last month, which continues a horrid run for the company. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Although its price has dipped substantially, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Toyo Tire as a highly attractive investment with its 3.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times have been advantageous for Toyo Tire as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Toyo Tire

Want the full picture on analyst estimates for the company? Then our free report on Toyo Tire will help you uncover what's on the horizon.

Is There Any Growth For Toyo Tire?

The only time you'd be truly comfortable seeing a P/E as depressed as Toyo Tire's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 106% gain to the company's bottom line. The latest three year period has also seen an excellent 289% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 6.1% per annum during the coming three years according to the twelve analysts following the company. Meanwhile, the broader market is forecast to expand by 9.6% per year, which paints a poor picture.

In light of this, it's understandable that Toyo Tire's P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Toyo Tire's P/E

Toyo Tire's P/E looks about as weak as its stock price lately. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Toyo Tire's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Toyo Tire (1 is concerning!) that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.

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