The Price Is Right For Toyo Seikan Group Holdings, Ltd. (TSE:5901)

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Toyo Seikan Group Holdings, Ltd. (TSE:5901) as a stock to potentially avoid with its 18.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Toyo Seikan Group Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Toyo Seikan Group Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Toyo Seikan Group Holdings will help you shine a light on its historical performance.

Is There Enough Growth For Toyo Seikan Group Holdings?

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

Retrospectively, the last year delivered an exceptional 128% gain to the company's bottom line. Pleasingly, EPS has also lifted 57% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 9.8% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Toyo Seikan Group Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

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 Toyo Seikan Group Holdings revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Toyo Seikan Group Holdings you should know about.

If you're unsure about the strength of Toyo Seikan Group Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.