Taiyo Yuden Co., Ltd.'s (TSE:6976) Stock Retreats 26% But Earnings Haven't Escaped The Attention Of Investors

Taiyo Yuden Co., Ltd. (TSE:6976) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 33% share price drop.

Even after such a large drop in price, Taiyo Yuden may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's superior to most other companies of late, Taiyo Yuden has been doing relatively well. 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.

See our latest analysis for Taiyo Yuden

Keen to find out how analysts think Taiyo Yuden's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Taiyo Yuden's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 15% gain to the company's bottom line. Still, incredibly EPS has fallen 63% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 40% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 9.3% each year growth forecast for the broader market.

In light of this, it's understandable that Taiyo Yuden's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Even after such a strong price drop, Taiyo Yuden's P/E still exceeds the rest of the market significantly. 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.

As we suspected, our examination of Taiyo Yuden's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Taiyo Yuden that you need to be mindful of.

Of course, you might also be able to find a better stock than Taiyo Yuden. 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.