Even With A 27% Surge, Cautious Investors Are Not Rewarding Nihon Tokushu Toryo Co., Ltd.'s (TSE:4619) Performance Completely

Nihon Tokushu Toryo Co., Ltd. (TSE:4619) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 40%.

Even after such a large jump in price, given about half the companies in Japan have price-to-earnings ratios (or "P/E's") above 14x, you may still consider Nihon Tokushu Toryo as an attractive investment with its 7.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

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The earnings growth achieved at Nihon Tokushu Toryo over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Nihon Tokushu Toryo

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How Is Nihon Tokushu Toryo's Growth Trending?

Nihon Tokushu Toryo's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. The latest three year period has also seen an excellent 279% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is only predicted to deliver 9.6% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we find it odd that Nihon Tokushu Toryo is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

The latest share price surge wasn't enough to lift Nihon Tokushu Toryo's P/E close to the market median. 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.

We've established that Nihon Tokushu Toryo currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Nihon Tokushu Toryo with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.