Investors Appear Satisfied With Tokyo Ohka Kogyo Co., Ltd.'s (TSE:4186) Prospects As Shares Rocket 34%

Tokyo Ohka Kogyo Co., Ltd. (TSE:4186) shares have continued their recent momentum with a 34% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 89% in the last year.

After such a large jump in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Tokyo Ohka Kogyo as a stock to avoid entirely with its 43.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Tokyo Ohka Kogyo could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Tokyo Ohka Kogyo

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

Is There Enough Growth For Tokyo Ohka Kogyo?

In order to justify its P/E ratio, Tokyo Ohka Kogyo would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 36% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 32% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 28% per annum over the next three years. That's shaping up to be materially higher than the 9.9% per year growth forecast for the broader market.

In light of this, it's understandable that Tokyo Ohka Kogyo's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Tokyo Ohka Kogyo's P/E

Shares in Tokyo Ohka Kogyo have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of Tokyo Ohka Kogyo's 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.

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

Of course, you might also be able to find a better stock than Tokyo Ohka Kogyo. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.