Tamron Co.,Ltd.'s (TSE:7740) Shares May Have Run Too Fast Too Soon

It's not a stretch to say that Tamron Co.,Ltd.'s (TSE:7740) price-to-earnings (or "P/E") ratio of 12.8x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 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.

Recent times have been advantageous for TamronLtd as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for TamronLtd

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

Is There Some Growth For TamronLtd?

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

Retrospectively, the last year delivered an exceptional 32% gain to the company's bottom line. The latest three year period has also seen an excellent 368% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 3.6% each year as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 9.7% per year, which is noticeably more attractive.

With this information, we find it interesting that TamronLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On TamronLtd's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that TamronLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for TamronLtd that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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.

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