Takara Standard Co.,Ltd. (TSE:7981) Stock Rockets 32% As Investors Are Less Pessimistic Than Expected

Takara Standard Co.,Ltd. (TSE:7981) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Although its price has surged higher, there still wouldn't be many who think Takara StandardLtd's price-to-earnings (or "P/E") ratio of 13.9x is worth a mention when the median P/E in Japan is similar at about 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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The earnings growth achieved at Takara StandardLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Takara StandardLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Takara StandardLtd's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Takara StandardLtd would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. The latest three year period has also seen a 11% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 9.6% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Takara StandardLtd is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Takara StandardLtd's P/E?

Its shares have lifted substantially and now Takara StandardLtd's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Takara StandardLtd revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Takara StandardLtd that you need to be mindful of.

If these risks are making you reconsider your opinion on Takara StandardLtd, 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.