Nippon Gas Co., Ltd.'s (TSE:8174) Price Is Out Of Tune With Earnings

When close to half the companies in Japan have price-to-earnings ratios (or "P/E's") below 14x, you may consider Nippon Gas Co., Ltd. (TSE:8174) as a stock to avoid entirely with its 22.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for Nippon Gas as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Nippon Gas

Keen to find out how analysts think Nippon Gas' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Nippon Gas?

The only time you'd be truly comfortable seeing a P/E as steep as Nippon Gas' is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 47% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 56% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 8.0% each year as estimated by the four analysts watching the company. With the market predicted to deliver 11% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it concerning that Nippon Gas is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Nippon Gas' P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Nippon Gas currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for Nippon Gas you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.