Market Participants Recognise Tokyo Gas Co.,Ltd.'s (TSE:9531) Earnings Pushing Shares 35% Higher

Tokyo Gas Co.,Ltd. (TSE:9531) shares have had a really impressive month, gaining 35% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 30%.

Following the firm bounce in price, Tokyo GasLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.1x, 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 high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Tokyo GasLtd's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Tokyo GasLtd

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

How Is Tokyo GasLtd's Growth Trending?

In order to justify its P/E ratio, Tokyo GasLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 71% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 82% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 14% per annum during the coming three years according to the five analysts following the company. With the market only predicted to deliver 10% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Tokyo GasLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Tokyo GasLtd shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Tokyo GasLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

You always need to take note of risks, for example - Tokyo GasLtd has 3 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Tokyo GasLtd. 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.