Tokyu Corporation's (TSE:9005) Price Is Out Of Tune With Earnings

There wouldn't be many who think Tokyu Corporation's (TSE:9005) price-to-earnings (or "P/E") ratio of 12.5x 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.

Recent times have been advantageous for Tokyu as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Tokyu

Want the full picture on analyst estimates for the company? Then our free report on Tokyu will help you uncover what's on the horizon.

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

The only time you'd be comfortable seeing a P/E like Tokyu's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 86% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 2.0% per year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% per annum, which is noticeably more attractive.

In light of this, it's curious that Tokyu's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Tokyu's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these 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 Tokyu that you need to be mindful of.

You might be able to find a better investment than Tokyu. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.