Investors Appear Satisfied With TS TECH Co., Ltd.'s (TSE:7313) Prospects

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may consider TS TECH Co., Ltd. (TSE:7313) as a stock to potentially avoid with its 17.5x P/E ratio. 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 TS TECH as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for TS TECH

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

Is There Enough Growth For TS TECH?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 89% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 51% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.6% per year, which is noticeably less attractive.

With this information, we can see why TS TECH is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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 TS TECH's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for TS TECH with six simple checks on some of these key factors.

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.