After Leaping 28% Tokyo Seimitsu Co., Ltd. (TSE:7729) Shares Are Not Flying Under The Radar

Despite an already strong run, Tokyo Seimitsu Co., Ltd. (TSE:7729) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 140% in the last year.

Since its price has surged higher, Tokyo Seimitsu may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26.2x, 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.

Tokyo Seimitsu hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Tokyo Seimitsu

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

Is There Enough Growth For Tokyo Seimitsu?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 159% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the eight analysts following the company. That's shaping up to be materially higher than the 10% per annum growth forecast for the broader market.

In light of this, it's understandable that Tokyo Seimitsu's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Tokyo Seimitsu's P/E is flying high just like its stock has during the last month. 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.

We've established that Tokyo Seimitsu maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these 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 Tokyo Seimitsu you should know about.

You might be able to find a better investment than Tokyo Seimitsu. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.