Tokyo Radiator Mfg.Co.,Ltd. (TSE:7235) Held Back By Insufficient Growth Even After Shares Climb 25%

The Tokyo Radiator Mfg.Co.,Ltd. (TSE:7235) share price has done very well over the last month, posting an excellent gain of 25%. The last month tops off a massive increase of 116% in the last year.

In spite of the firm bounce in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Tokyo Radiator Mfg.Co.Ltd as an attractive investment with its 7.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

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The earnings growth achieved at Tokyo Radiator Mfg.Co.Ltd over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Tokyo Radiator Mfg.Co.Ltd

Although there are no analyst estimates available for Tokyo Radiator Mfg.Co.Ltd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Tokyo Radiator Mfg.Co.Ltd's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

This is in contrast to the rest of the market, which is expected to grow by 9.2% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Tokyo Radiator Mfg.Co.Ltd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Bottom Line On Tokyo Radiator Mfg.Co.Ltd's P/E

Despite Tokyo Radiator Mfg.Co.Ltd's shares building up a head of steam, its P/E still lags most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Tokyo Radiator Mfg.Co.Ltd revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term 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 Tokyo Radiator Mfg.Co.Ltd that you should be aware of.

Of course, you might also be able to find a better stock than Tokyo Radiator Mfg.Co.Ltd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.