Why Investors Shouldn't Be Surprised By Toho Titanium Company, Limited's (TSE:5727) 32% Share Price Surge

Despite an already strong run, Toho Titanium Company, Limited (TSE:5727) shares have been powering on, with a gain of 32% in the last thirty days. The last 30 days bring the annual gain to a very sharp 46%.

Following the firm bounce in price, Toho Titanium Company's price-to-earnings (or "P/E") ratio of 48.9x 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 14x and even P/E's below 10x are quite common. 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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While the market has experienced earnings growth lately, Toho Titanium Company's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Toho Titanium Company

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

Toho Titanium Company's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 52%. The last three years don't look nice either as the company has shrunk EPS by 48% 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 39% per year as estimated by the three analysts watching the company. With the market only predicted to deliver 9.5% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Toho Titanium Company'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.

What We Can Learn From Toho Titanium Company's P/E?

Shares in Toho Titanium Company have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Toho Titanium Company maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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 Toho Titanium Company you should know about.

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.

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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.