There's Reason For Concern Over Takasago Thermal Engineering Co., Ltd.'s (TSE:1969) Massive 32% Price Jump

Takasago Thermal Engineering Co., Ltd. (TSE:1969) shares have continued their recent momentum with a 32% gain in the last month alone. The last month tops off a massive increase of 106% in the last year.

Although its price has surged higher, there still wouldn't be many who think Takasago Thermal Engineering's price-to-earnings (or "P/E") ratio of 14.8x is worth a mention when the median P/E in Japan is similar at about 14x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Takasago Thermal Engineering as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

View our latest analysis for Takasago Thermal Engineering

Keen to find out how analysts think Takasago Thermal Engineering's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For Takasago Thermal Engineering?

Takasago Thermal Engineering's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 53% gain to the company's bottom line. The latest three year period has also seen an excellent 135% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 1.1% per year as estimated by the six analysts watching the company. With the market predicted to deliver 9.9% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Takasago Thermal Engineering is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Takasago Thermal Engineering's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 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 moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Takasago Thermal Engineering with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Takasago Thermal Engineering. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.