After Leaping 33% Taiyo Holdings Co., Ltd. (TSE:4626) Shares Are Not Flying Under The Radar

Despite an already strong run, Taiyo Holdings Co., Ltd. (TSE:4626) shares have been powering on, with a gain of 33% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 100% in the last year.

Following the firm bounce in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 12x, you may consider Taiyo Holdings as a stock to avoid entirely with its 32.1x 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.

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Taiyo Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Taiyo Holdings

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

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 7.2% drop in EPS in aggregate. 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 19% per annum as estimated by the dual analysts watching the company. With the market only predicted to deliver 9.0% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Taiyo Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has got Taiyo Holdings' P/E rushing to great heights as well. 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 Taiyo 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Taiyo Holdings (of which 1 shouldn't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Taiyo Holdings. 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.