TOPPAN Holdings Inc. (TSE:7911) Stocks Shoot Up 36% But Its P/E Still Looks Reasonable

The TOPPAN Holdings Inc. (TSE:7911) share price has done very well over the last month, posting an excellent gain of 36%. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

Following the firm bounce in price, TOPPAN Holdings' price-to-earnings (or "P/E") ratio of 16.4x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 14x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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TOPPAN Holdings could be doing better as it's been growing earnings less than most other companies lately. 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.

See our latest analysis for TOPPAN Holdings

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like TOPPAN Holdings' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.5% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 35% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 12% per annum as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.1% per annum, which is noticeably less attractive.

With this information, we can see why TOPPAN Holdings is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From TOPPAN Holdings' P/E?

The large bounce in TOPPAN Holdings' shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of TOPPAN Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Having said that, be aware TOPPAN Holdings is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on TOPPAN Holdings, 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.