Earnings Not Telling The Story For Tokyo Seimitsu Co., Ltd. (TSE:7729) After Shares Rise 28%

Tokyo Seimitsu Co., Ltd. (TSE:7729) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 25% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think Tokyo Seimitsu's price-to-earnings (or "P/E") ratio of 12.2x is worth a mention when the median P/E in Japan is similar at about 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

We've discovered 2 warning signs about Tokyo Seimitsu. View them for free.

Recent times have been advantageous for Tokyo Seimitsu as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Tokyo Seimitsu

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

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Tokyo Seimitsu's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 41%. The strong recent performance means it was also able to grow EPS by 39% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 3.1% each year over the next three years. With the market predicted to deliver 9.8% growth per annum, the company is positioned for a weaker earnings result.

In light of this, it's curious that Tokyo Seimitsu's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Tokyo Seimitsu's P/E?

Its shares have lifted substantially and now Tokyo Seimitsu's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Tokyo Seimitsu currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Tokyo Seimitsu you should be aware of.

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.