What Teikoku Tsushin Kogyo Co., Ltd.'s (TSE:6763) 26% Share Price Gain Is Not Telling You

Teikoku Tsushin Kogyo Co., Ltd. (TSE:6763) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 62% in the last year.

After such a large jump in price, Teikoku Tsushin Kogyo may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26.5x, since almost half of all companies in Japan have P/E ratios under 13x and even P/E's lower than 9x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Teikoku Tsushin Kogyo over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do 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 Teikoku Tsushin Kogyo

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

Is There Enough Growth For Teikoku Tsushin Kogyo?

The only time you'd be truly comfortable seeing a P/E as steep as Teikoku Tsushin Kogyo's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 22% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 12% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Teikoku Tsushin Kogyo's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Teikoku Tsushin Kogyo's P/E?

Teikoku Tsushin Kogyo's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Teikoku Tsushin Kogyo revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Teikoku Tsushin Kogyo you should know about.

Of course, you might also be able to find a better stock than Teikoku Tsushin Kogyo. 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.