TOCALO Co.,Ltd. (TSE:3433) Stocks Pounded By 27% But Not Lagging Market On Growth Or Pricing

TOCALO Co.,Ltd. (TSE:3433) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 2.0% over the last twelve months.

Even after such a large drop in price, there still wouldn't be many who think TOCALOLtd's price-to-earnings (or "P/E") ratio of 13x is worth a mention when the median P/E in Japan is similar at about 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

TOCALOLtd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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How Is TOCALOLtd's Growth Trending?

The only time you'd be comfortable seeing a P/E like TOCALOLtd's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 10.0% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.6% per year, which is not materially different.

With this information, we can see why TOCALOLtd is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

What We Can Learn From TOCALOLtd's P/E?

With its share price falling into a hole, the P/E for TOCALOLtd looks quite average now. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that TOCALOLtd maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for TOCALOLtd that you should be aware of.

You might be able to find a better investment than TOCALOLtd. 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.

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