Optimistic Investors Push T&S Group Inc. (TSE:4055) Shares Up 38% But Growth Is Lacking

T&S Group Inc. (TSE:4055) shareholders have had their patience rewarded with a 38% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.1% in the last twelve months.

After such a large jump in price, given close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider T&S Group as a stock to avoid entirely with its 25.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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With earnings growth that's exceedingly strong of late, T&S Group has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for T&S Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on T&S Group's earnings, revenue and cash flow.

How Is T&S Group's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like T&S Group's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. As a result, it also grew EPS by 28% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

It's interesting to note that the rest of the market is similarly expected to grow by 9.2% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we find it interesting that T&S Group is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Final Word

Shares in T&S Group have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of T&S Group revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term 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 T&S Group you should be aware of, and 1 of them is significant.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.