There's No Escaping Tokyo Steel Manufacturing Co., Ltd.'s (TSE:5423) Muted Earnings Despite A 27% Share Price Rise

Tokyo Steel Manufacturing Co., Ltd. (TSE:5423) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.

Although its price has surged higher, Tokyo Steel Manufacturing's price-to-earnings (or "P/E") ratio of 8.2x might still make it look like a buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 14x and even P/E's above 21x 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 limited.

Tokyo Steel Manufacturing could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Tokyo Steel Manufacturing

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Tokyo Steel Manufacturing would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. Even so, admirably EPS has lifted 348% in aggregate from three years ago, notwithstanding the last 12 months. 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 six analysts covering the company suggest earnings should grow by 1.2% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 9.4% per year, which is noticeably more attractive.

In light of this, it's understandable that Tokyo Steel Manufacturing's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Tokyo Steel Manufacturing's P/E

Despite Tokyo Steel Manufacturing's shares building up a head of steam, its P/E still lags most other companies. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Tokyo Steel Manufacturing's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with Tokyo Steel Manufacturing.

Of course, you might also be able to find a better stock than Tokyo Steel Manufacturing. 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.