Toyo Tanso Co., Ltd. (TSE:5310) Looks Just Right With A 35% Price Jump

Toyo Tanso Co., Ltd. (TSE:5310) shares have continued their recent momentum with a 35% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

Since its price has surged higher, Toyo Tanso may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 19x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. 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.

Recent times have been advantageous for Toyo Tanso 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out 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.

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 Toyo Tanso's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 45% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 182% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 13% each year as estimated by the eight analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.9% per year, which is noticeably less attractive.

In light of this, it's understandable that Toyo Tanso's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Toyo Tanso's P/E

Toyo Tanso shares have received a push in the right direction, but its P/E is elevated too. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Toyo Tanso's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Toyo Tanso that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.