Why We're Not Concerned Yet About Union Tool Co.'s (TSE:6278) 27% Share Price Plunge

Union Tool Co. (TSE:6278) shares have had a horrible month, losing 27% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 55% in the last year.

Although its price has dipped substantially, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 13x, you may still consider Union Tool as a stock to avoid entirely with its 21.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Union Tool as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Union Tool

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

Is There Enough Growth For Union Tool?

In order to justify its P/E ratio, Union Tool would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. As a result, it also grew EPS by 14% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 31% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 13% growth forecast for the broader market.

In light of this, it's understandable that Union Tool's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Union Tool's shares may have retreated, but its P/E is still flying high. 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 Union Tool maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Union Tool that you need to be mindful of.

You might be able to find a better investment than Union Tool. 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).

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

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.