Subdued Growth No Barrier To Takaoka Toko Co., Ltd. (TSE:6617) With Shares Advancing 26%
Takaoka Toko Co., Ltd. (TSE:6617) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 133% in the last year.
Even after such a large jump in price, there still wouldn't be many who think Takaoka Toko's price-to-earnings (or "P/E") ratio of 14.9x is worth a mention when the median P/E in Japan is similar at about 15x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent earnings growth for Takaoka Toko has been in line with the market. It seems that many are expecting the mediocre earnings performance to persist, which has held the P/E back. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.
See our latest analysis for Takaoka Toko
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like Takaoka Toko's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. The latest three year period has also seen an excellent 32% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 5.6% per annum over the next three years. That's shaping up to be materially lower than the 8.9% each year growth forecast for the broader market.
With this information, we find it interesting that Takaoka Toko is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Bottom Line On Takaoka Toko's P/E
Takaoka Toko appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
Our examination of Takaoka Toko's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Takaoka Toko with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on Takaoka Toko, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.