Toyo Tire Corporation's (TSE:5105) Shares Lagging The Market But So Is The Business

Toyo Tire Corporation's (TSE:5105) price-to-earnings (or "P/E") ratio of 5.5x might make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 24x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Toyo Tire as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Toyo Tire

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Toyo Tire.

What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Toyo Tire would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered an exceptional 51% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 519% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 4.5% each year during the coming three years according to the ten analysts following the company. Meanwhile, the broader market is forecast to expand by 10% per year, which paints a poor picture.

With this information, we are not surprised that Toyo Tire is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

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

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.