Earnings Not Telling The Story For MTG Co., Ltd. (TSE:7806) After Shares Rise 31%

Despite an already strong run, MTG Co., Ltd. (TSE:7806) shares have been powering on, with a gain of 31% in the last thirty days. The annual gain comes to 108% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, MTG's price-to-earnings (or "P/E") ratio of 29.4x might make it look like a strong sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 12x and even P/E's below 9x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

We've discovered 1 warning sign about MTG. View them for free.

MTG certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for MTG

Keen to find out how analysts think MTG's future stacks up against the industry? In that case, our free report is a great place to start.

How Is MTG's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 116% last year. Still, incredibly EPS has fallen 25% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 12% per year during the coming three years according to the three analysts following the company. That's shaping up to be similar to the 9.8% each year growth forecast for the broader market.

With this information, we find it interesting that MTG is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On MTG's P/E

MTG'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 MTG 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.

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

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.