Tokyo Electron Device Limited (TSE:2760) Stock Rockets 33% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Tokyo Electron Device Limited (TSE:2760) shares have been powering on, with a gain of 33% in the last thirty days. The last month tops off a massive increase of 194% in the last year.

Since its price has surged higher, Tokyo Electron Device may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 23.8x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been advantageous for Tokyo Electron Device as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Tokyo Electron Device

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

Is There Enough Growth For Tokyo Electron Device?

In order to justify its P/E ratio, Tokyo Electron Device would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 39%. The latest three year period has also seen an excellent 261% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 5.6% during the coming year according to the lone analyst following the company. That's shaping up to be materially lower than the 11% growth forecast for the broader market.

With this information, we find it concerning that Tokyo Electron Device is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Tokyo Electron Device's P/E

Shares in Tokyo Electron Device have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Tokyo Electron Device's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Tokyo Electron Device that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.