Some Confidence Is Lacking In Tomoe Engineering Co., Ltd.'s (TSE:6309) P/E

With a price-to-earnings (or "P/E") ratio of 16.6x Tomoe Engineering Co., Ltd. (TSE:6309) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Tomoe Engineering as its earnings have been rising slower than most other companies. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Tomoe Engineering

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Tomoe Engineering would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 2.8%. This was backed up an excellent period prior to see EPS up by 78% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the one analyst following the company. With the market predicted to deliver 10% growth per annum, the company is positioned for a comparable earnings result.

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

The Final Word

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 Tomoe Engineering currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Tomoe Engineering that we have uncovered.

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.