Lacklustre Performance Is Driving Nichias Corporation's (TSE:5393) Low P/E
Nichias Corporation (TSE:5393) has a low P/E ratio of 11.9x, indicating potential investor concerns about its sluggish earnings growth compared to the market. Despite a 5.2% EPS growth last year and a 41% increase over three years, future earnings are projected to grow only 3.5% annually, below the market's 9.6%. This outlook contributes to its low P/E, as investors doubt significant improvement. The company's balance sheet also poses risks, suggesting a cautious approach for potential investors.
With a price-to-earnings (or "P/E") ratio of 11.9x Nichias Corporation (TSE:5393) may be sending bullish signals at the moment, given that almost half of all companies in Japan have P/E ratios greater than 15x and even P/E's higher than 23x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
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Recent times haven't been advantageous for Nichias as its earnings have been rising slower than most other companies. The P/E is probably low because investors think this lacklustre earnings performance isn't going to get any better. If you still like the company, you'd be hoping earnings don't get any worse and that you could pick up some stock while it's out of favour.
See our latest analysis for Nichias
Want the full picture on analyst estimates for the company? Then our free report on Nichias will help you uncover what's on the horizon.
Is There Any Growth For Nichias?
In order to justify its P/E ratio, Nichias would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 5.2% last year. Pleasingly, EPS has also lifted 41% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 3.5% per annum over the next three years. With the market predicted to deliver 9.6% growth each year, the company is positioned for a weaker earnings result.
With this information, we can see why Nichias is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Bottom Line On Nichias' P/E
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.
As we suspected, our examination of Nichias' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Nichias with six simple checks.
Of course, you might also be able to find a better stock than Nichias. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
