Take Care Before Jumping Onto Treasure Factory Co.,LTD. (TSE:3093) Even Though It's 27% Cheaper

The Treasure Factory Co.,LTD. (TSE:3093) share price has fared very poorly over the last month, falling by a substantial 27%. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 15%.

In spite of the heavy fall in price, it's still not a stretch to say that Treasure FactoryLTD's price-to-earnings (or "P/E") ratio of 12.7x right now seems quite "middle-of-the-road" compared to the market in Japan, where the median P/E ratio is around 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been advantageous for Treasure FactoryLTD as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Treasure FactoryLTD

Want the full picture on analyst estimates for the company? Then our free report on Treasure FactoryLTD will help you uncover what's on the horizon.

How Is Treasure FactoryLTD's Growth Trending?

Treasure FactoryLTD's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 22%. The strong recent performance means it was also able to grow EPS by 1,231% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 13% per year as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 9.7% each year, which is noticeably less attractive.

In light of this, it's curious that Treasure FactoryLTD's P/E sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

Treasure FactoryLTD's plummeting stock price has brought its P/E right back to the rest of the market. 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 Treasure FactoryLTD currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Treasure FactoryLTD that you need to be mindful of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.