Earnings Not Telling The Story For Takasago Thermal Engineering Co., Ltd. (TSE:1969) After Shares Rise 28%

Takasago Thermal Engineering Co., Ltd. (TSE:1969) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking further back, the 23% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Takasago Thermal Engineering's price-to-earnings (or "P/E") ratio of 19.3x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

We've discovered 1 warning sign about Takasago Thermal Engineering. View them for free.

With earnings growth that's superior to most other companies of late, Takasago Thermal Engineering has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Takasago Thermal Engineering

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How Is Takasago Thermal Engineering's Growth Trending?

In order to justify its P/E ratio, Takasago Thermal Engineering would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. The latest three year period has also seen an excellent 107% overall rise in EPS, aided somewhat 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.

Looking ahead now, EPS is anticipated to climb by 7.7% per year during the coming three years according to the six analysts following the company. With the market predicted to deliver 9.8% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Takasago Thermal Engineering is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Takasago Thermal Engineering's P/E

Takasago Thermal Engineering shares have received a push in the right direction, but its P/E is elevated too. 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 Takasago Thermal Engineering currently trades on a much 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 high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You always need to take note of risks, for example - Takasago Thermal Engineering has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Takasago Thermal Engineering. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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