Toyo Seikan Group Holdings, Ltd.'s (TSE:5901) Share Price Matching Investor Opinion

Toyo Seikan Group Holdings, Ltd.'s (TSE:5901) price-to-earnings (or "P/E") ratio of 16.8x might make it look like a sell right now compared to the market in Japan, where around half of the companies have P/E ratios below 13x and even P/E's below 9x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's superior to most other companies of late, Toyo Seikan Group Holdings has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Toyo Seikan Group Holdings

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Does Growth Match The High P/E?

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.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 24% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 18% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.8% per year, which is noticeably less attractive.

In light of this, it's understandable that Toyo Seikan Group 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 Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Toyo Seikan Group Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Toyo Seikan Group Holdings has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Toyo Seikan Group Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.