Taisei Corporation's (TSE:1801) Shares Climb 29% But Its Business Is Yet to Catch Up

Taisei Corporation (TSE:1801) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 32%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Taisei's P/E ratio of 12.5x, since the median price-to-earnings (or "P/E") ratio in Japan is also close to 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

We've discovered 1 warning sign about Taisei. View them for free.

With earnings growth that's superior to most other companies of late, Taisei has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Taisei

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

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Taisei's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 214% last year. The latest three year period has also seen an excellent 64% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 6.5% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.8% per annum, which is noticeably more attractive.

With this information, we find it interesting that Taisei is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Taisei's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Taisei's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Taisei that we have uncovered.

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.