What Tsuzuki Denki Co., Ltd.'s (TSE:8157) 30% Share Price Gain Is Not Telling You

Tsuzuki Denki Co., Ltd. (TSE:8157) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, despite the strong performance over the last month, the full year gain of 9.9% isn't as attractive.

Although its price has surged higher, there still wouldn't be many who think Tsuzuki Denki's price-to-earnings (or "P/E") ratio of 14.5x is worth a mention when the median P/E in Japan is similar at about 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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For example, consider that Tsuzuki Denki's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Tsuzuki Denki

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Does Growth Match The P/E?

Tsuzuki Denki's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered a frustrating 55% 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 4.7% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 9.7% shows it's an unpleasant look.

With this information, we find it concerning that Tsuzuki Denki is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Tsuzuki Denki's P/E

Tsuzuki Denki's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that Tsuzuki Denki currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

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

Of course, you might also be able to find a better stock than Tsuzuki Denki. 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.