What You Can Learn From Tri Chemical Laboratories Inc.'s (TSE:4369) P/E After Its 26% Share Price Crash

Tri Chemical Laboratories Inc. (TSE:4369) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 43% share price drop.

Even after such a large drop in price, Tri Chemical Laboratories may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.8x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been advantageous for Tri Chemical Laboratories as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Tri Chemical Laboratories

Keen to find out how analysts think Tri Chemical Laboratories' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Tri Chemical Laboratories?

In order to justify its P/E ratio, Tri Chemical Laboratories would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 101% gain to the company's bottom line. As a result, it also grew EPS by 21% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 14% each year over the next three years. With the market only predicted to deliver 9.5% each year, the company is positioned for a stronger earnings result.

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

The Final Word

Despite the recent share price weakness, Tri Chemical Laboratories' P/E remains higher than most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Tri Chemical Laboratories 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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Tri Chemical Laboratories that you should be aware of.

Of course, you might also be able to find a better stock than Tri Chemical Laboratories. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.