Earnings Tell The Story For Toumei Co.,Ltd. (TSE:4439) As Its Stock Soars 26%

Toumei Co.,Ltd. (TSE:4439) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 39%.

Following the firm bounce in price, ToumeiLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 21.9x, 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.

ToumeiLtd could be doing better as it's been growing earnings less than most other companies lately. One possibility is that the P/E is high because investors think this lacklustre earnings performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for ToumeiLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on ToumeiLtd.

What Are Growth Metrics Telling Us About The High P/E?

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

Retrospectively, the last year delivered a decent 8.8% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 255% 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.

Looking ahead now, EPS is anticipated to climb by 38% during the coming year according to the one analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 10%, which is noticeably less attractive.

In light of this, it's understandable that ToumeiLtd'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 Key Takeaway

ToumeiLtd's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of ToumeiLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for ToumeiLtd with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than ToumeiLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.