Tamai Steamship Co., Ltd. (TSE:9127) Soars 29% But It's A Story Of Risk Vs Reward

Tamai Steamship Co., Ltd. (TSE:9127) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The annual gain comes to 103% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Tamai Steamship's price-to-earnings (or "P/E") ratio of 3.3x might still make it look like a strong buy right now compared to the market in Japan, where around half of the companies have P/E ratios above 15x and even P/E's above 23x are quite common. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

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Recent times have been quite advantageous for Tamai Steamship as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Tamai Steamship

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tamai Steamship's earnings, revenue and cash flow.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Tamai Steamship's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 128%. The latest three year period has also seen an excellent 31% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 11% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.

With this information, we find it odd that Tamai Steamship is trading at a P/E lower than the market. Apparently some shareholders are more bearish than recent times would indicate and have been accepting lower selling prices.

The Bottom Line On Tamai Steamship's P/E

Shares in Tamai Steamship are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

We've established that Tamai Steamship currently trades on a lower than expected P/E since its recent three-year growth is in line with the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching the company's performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

You should always think about risks. Case in point, we've spotted 4 warning signs for Tamai Steamship you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.