Getting In Cheap On Takasago Thermal Engineering Co., Ltd. (TSE:1969) Is Unlikely

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Takasago Thermal Engineering Co., Ltd. (TSE:1969) as a stock to potentially avoid with its 20.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for Takasago Thermal Engineering as its earnings have been rising faster than most other companies. 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.

Check out our latest analysis for Takasago Thermal Engineering

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

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

The only time you'd be truly comfortable seeing a P/E as high as Takasago Thermal Engineering's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 60%. Pleasingly, EPS has also lifted 103% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 9.7% each year over the next three years. That's shaping up to be similar to the 9.6% per annum growth forecast for the broader market.

With this information, we find it interesting that Takasago Thermal Engineering is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Takasago Thermal Engineering currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Takasago Thermal Engineering (1 is concerning!) that you need to take into consideration.

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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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.