Techno Alpha Co., Ltd. (TSE:3089) Shares Fly 38% But Investors Aren't Buying For Growth

Techno Alpha Co., Ltd. (TSE:3089) shareholders have had their patience rewarded with a 38% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Although its price has surged higher, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 15x, you may still consider Techno Alpha as an attractive investment with its 11.5x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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With earnings growth that's exceedingly strong of late, Techno Alpha has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Techno Alpha

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Techno Alpha will help you shine a light on its historical performance.

Is There Any Growth For Techno Alpha?

In order to justify its P/E ratio, Techno Alpha would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 43% last year. EPS has also lifted 13% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we can see why Techno Alpha is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

Despite Techno Alpha's shares building up a head of steam, its P/E still lags most other companies. 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.

As we suspected, our examination of Techno Alpha revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Techno Alpha.

Of course, you might also be able to find a better stock than Techno Alpha. 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.