Techno Ryowa Ltd. (TSE:1965) Stock Rockets 33% But Many Are Still Ignoring The Company

Techno Ryowa Ltd. (TSE:1965) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 42% 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 14x, you may still consider Techno Ryowa as an attractive investment with its 8.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Techno Ryowa certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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.

View our latest analysis for Techno Ryowa

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Does Growth Match The Low P/E?

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

Retrospectively, the last year delivered an exceptional 103% gain to the company's bottom line. The latest three year period has also seen an excellent 236% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

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.

In light of this, it's peculiar that Techno Ryowa's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Techno Ryowa's P/E?

Despite Techno Ryowa's shares building up a head of steam, its P/E still lags most other companies. 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.

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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Techno Ryowa (of which 1 is potentially serious!) you should know about.

If these risks are making you reconsider your opinion on Techno Ryowa, 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.