Totetsu Kogyo Co., Ltd.'s (TSE:1835) Shares May Have Run Too Fast Too Soon

With a median price-to-earnings (or "P/E") ratio of close to 13x in Japan, you could be forgiven for feeling indifferent about Totetsu Kogyo Co., Ltd.'s (TSE:1835) P/E ratio of 11.8x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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With earnings growth that's superior to most other companies of late, Totetsu Kogyo has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 not quite in favour.

See our latest analysis for Totetsu Kogyo

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

Does Growth Match The P/E?

In order to justify its P/E ratio, Totetsu Kogyo would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 16% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 69% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 4.6% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 9.2% growth forecast for the broader market.

With this information, we find it interesting that Totetsu Kogyo is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Totetsu Kogyo's P/E

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.

We've established that Totetsu Kogyo currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. 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 settle on your opinion, we've discovered 1 warning sign for Totetsu Kogyo that you should be aware of.

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.