Tomoe Corporation (TSE:1921) Soars 26% But It's A Story Of Risk Vs Reward

Tomoe Corporation (TSE:1921) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last month tops off a massive increase of 107% in the last year.

Although its price has surged higher, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 13x, you may still consider Tomoe as a highly attractive investment with its 3.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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

Recent times have been quite advantageous for Tomoe as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong 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.

View our latest analysis for Tomoe

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Tomoe will help you shine a light on its historical performance.

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

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

If we review the last year of earnings growth, the company posted a terrific increase of 372%. The strong recent performance means it was also able to grow EPS by 429% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 9.7% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Tomoe is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Shares in Tomoe are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Tomoe currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Tomoe is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Tomoe, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.