Techno Ryowa Ltd. (TSE:1965) Might Not Be As Mispriced As It Looks After Plunging 27%

The Techno Ryowa Ltd. (TSE:1965) share price has fared very poorly over the last month, falling by a substantial 27%. Longer-term, the stock has been solid despite a difficult 30 days, gaining 17% in the last year.

Even after such a large drop in price, Techno Ryowa may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.1x, since almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 19x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

With earnings growth that's exceedingly strong of late, Techno Ryowa has been doing very well. 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 that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Techno Ryowa

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

How Is Techno Ryowa's Growth Trending?

In order to justify its P/E ratio, Techno Ryowa would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 89%. The latest three year period has also seen an excellent 223% overall rise in EPS, aided by its short-term performance. 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 10% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Techno Ryowa is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Techno Ryowa's P/E

Techno Ryowa's P/E has taken a tumble along with its share price. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Techno Ryowa revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Plus, you should also learn about these 2 warning signs we've spotted with Techno Ryowa (including 1 which doesn't sit too well with us).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.