Stock Analysis

There's Reason For Concern Over Tamura Corporation's (TSE:6768) Massive 26% Price Jump

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TSE:6768

Tamura Corporation (TSE:6768) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

After such a large jump in price, Tamura may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.2x, 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 high for a reason and it requires further investigation to determine if it's justified.

Tamura certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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TSE:6768 Price to Earnings Ratio vs Industry January 23rd 2025
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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Tamura's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 268% last year. The strong recent performance means it was also able to grow EPS by 584% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 7.6% each year as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 10% each year growth forecast for the broader market.

With this information, we find it concerning that Tamura is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in Tamura's shares has lifted the company's P/E to a fairly high level. 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 Tamura'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.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Tamura with six simple checks.

If these risks are making you reconsider your opinion on Tamura, explore our interactive list of high quality stocks to get an idea of what else is out there.

Valuation is complex, but we're here to simplify it.

Discover if Tamura might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.