Subdued Growth No Barrier To TDK Corporation's (TSE:6762) Price

With a price-to-earnings (or "P/E") ratio of 15.2x TDK Corporation (TSE:6762) may be sending bearish signals at the moment, given that almost half of all companies in Japan have P/E ratios under 12x and even P/E's lower than 8x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Recent times have been advantageous for TDK as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for TDK

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

Is There Enough Growth For TDK?

In order to justify its P/E ratio, TDK would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 71%. The strong recent performance means it was also able to grow EPS by 34% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the analysts watching the company. That's shaping up to be similar to the 9.6% per year growth forecast for the broader market.

In light of this, it's curious that TDK's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From TDK's 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 TDK's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

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

You might be able to find a better investment than TDK. 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.