Investors Appear Satisfied With Tri Chemical Laboratories Inc.'s (TSE:4369) Prospects As Shares Rocket 30%

The Tri Chemical Laboratories Inc. (TSE:4369) share price has done very well over the last month, posting an excellent gain of 30%. The last month tops off a massive increase of 104% in the last year.

After such a large jump in price, Tri Chemical Laboratories may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 67.9x, since almost half of all companies in Japan have P/E ratios under 14x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Tri Chemical Laboratories hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Tri Chemical Laboratories

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tri Chemical Laboratories.

How Is Tri Chemical Laboratories' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Tri Chemical Laboratories' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 57%. As a result, earnings from three years ago have also fallen 38% overall. 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 four analysts covering the company suggest earnings should grow by 60% over the next year. That's shaping up to be materially higher than the 11% growth forecast for the broader market.

With this information, we can see why Tri Chemical Laboratories is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got Tri Chemical Laboratories' P/E rushing to great heights as well. 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 Tri Chemical Laboratories' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 2 warning signs for Tri Chemical Laboratories that we have uncovered.

If you're unsure about the strength of Tri Chemical Laboratories' 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.