TOKYO KEIKI INC. (TSE:7721) Stocks Shoot Up 28% But Its P/E Still Looks Reasonable

Despite an already strong run, TOKYO KEIKI INC. (TSE:7721) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 187% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, TOKYO KEIKI may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26.6x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 10x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

TOKYO KEIKI certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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How Is TOKYO KEIKI's Growth Trending?

TOKYO KEIKI's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 161% last year. The latest three year period has also seen an excellent 140% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 19% each year over the next three years. That's shaping up to be materially higher than the 9.6% each year growth forecast for the broader market.

With this information, we can see why TOKYO KEIKI is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

TOKYO KEIKI's P/E is flying high just like its stock has during the last month. 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 TOKYO KEIKI 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for TOKYO KEIKI you should be aware of.

If these risks are making you reconsider your opinion on TOKYO KEIKI, 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.

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