There's No Escaping Toyo Tanso Co., Ltd.'s (TSE:5310) Muted Earnings Despite A 27% Share Price Rise

Toyo Tanso Co., Ltd. (TSE:5310) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 49% over that time.

Even after such a large jump in price, Toyo Tanso may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 8.6x, since almost half of all companies in Japan have P/E ratios greater than 13x and even P/E's higher than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Our free stock report includes 1 warning sign investors should be aware of before investing in Toyo Tanso. Read for free now.

Toyo Tanso certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 out of favour.

See our latest analysis for Toyo Tanso

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

How Is Toyo Tanso's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 33% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 123% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 0.8% per annum during the coming three years according to the eight analysts following the company. With the market predicted to deliver 9.8% growth per year, the company is positioned for a weaker earnings result.

With this information, we can see why Toyo Tanso is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Toyo Tanso's P/E?

Toyo Tanso's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Toyo Tanso maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Toyo Tanso you should know about.

If these risks are making you reconsider your opinion on Toyo Tanso, 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.